Asking for a loan without having an idea about your credit worthiness may increase the chances of facing rejection and dent your credit score further.
For a first-time loan seeker, it’s often not easy to understand his or her eligibility for a loan. And approaching a lending institution without having an idea about one’s credit worthiness may only increase the chances of facing rejection. If enquiries and rejections happen repeatedly, it makes a dent on the credit score which in turn reduces the borrowing capacity further.
Let’s take a quick look at the ways you can understand your loan eligibility before applying for a loan.
What’s your EMI-paying capacity?
When you take a loan from a regulated lender such as a bank or NBFC, you need to repay the money with interest as per a monthly repayment schedule. The repayment is broken down into EMIs. When you apply for a loan, the lender takes into consideration several factors related to your profile and the purpose of borrowing before deciding on the loan amount that you can be given. Every lender sets his own parameters for lending. For example, say, your monthly salary is Rs 50,000 and you are paying a car loan EMI of Rs 7,000. Now, if you are seeking a home loan, the maximum EMI you are eligible for would be Rs 15,500. The maximum loan amount you would be eligible for is Rs 17.6 lakh. So if you go seeking for a loan higher than that amount, you might face challenges.
Take stock of existing loans
Banks and financial institutions look at the existing loans an individual holds among other things to arrive at his repayment capacity. The bigger your current loans are, the lower your EMI-paying capacity will be, thus affecting your eligibility for a new loan. If you have repayment pending for loans, you may want to reduce them or pre-close them before opting for a new loan.
Check loan criteria
For many lending products, the eligibility criteria is clearly mentioned on the lender’s website or product brochure. For example, one lender may need you to be above 21 years and below 60 years. Another may need a minimum monthly income of Rs 25,000. Some may offer you a preferential interest rate if you’re working with an MNC or a PSU, others may give concession on interest rates to women. Some banks may prefer candidates who have spent at least a year in their current jobs and have a minimum total work experience of two years. Also, the criteria will differ from one loan product to another. For example, the criteria for a home loan could be significantly different from that of a personal loan with the same lender.
Check credit score
Your credit report is something a lender will refer to in order to determine your credit worthiness and the interest rate applicable. A credit report is a collation of your borrowing history. It also mentions your credit score—a numerical expression of your creditworthiness. It typically ranges between 300 and 900, 900 being the perfect score. Many lenders today provide attractive interest rates to borrowers whose scores are at 750 or above. So what is your credit score? You need not be in the dark about it. Just Google for “free credit report”, and get yours for free in two minutes. Refer to the report to understand your creditworthiness.
Use an online calculator
Lastly, there are many online loan eligibility calculators. They calculate your eligibility using your current income, current liabilities, and the EMIs on your existing loans. Use them to get an idea of how much you can borrow given your vitals.
The writer is CEO, BankBazaar.com