Availing a loan can have long-term implications on your financial health. Here’s how you can increase your loan approval chances at optimum cost.
From arranging capital for your business to funding your dream car or home, loans allow you to achieve your financial goals sooner by bridging fund shortages. However, availing loans can have long-term implications on your financial health. Their approval would also depend on multiple factors.
Here’s how you can increase your loan approval chances at optimum cost:
1. Compare various lenders
Apart from interest rate, factors like processing fee and prepayment charges also play a crucial role in determining your overall loan cost. Even the loan tenure can vary across different lenders. Hence, before applying for a loan, you must always compare loan options offered by various lenders. Visit online financial marketplace and choose a loan product on the basis of your monthly income, job profile, credit score, employer’s profile and other eligibility criterion. Also, your existing bank may provide you a loan at a comparatively lower interest rate, depending on your profile. Hence, check with them alongside and choose the lender wisely.
2. Opt for loan tenure basis your repayment capacity
Opt for a loan tenure on the basis of your repayment capacity and contributions required to meet financial goals. Choose a shorter tenure if you can repay the EMIs by due date without forgoing your contribution towards your crucial financial goals. If not, opt for a longer tenure to reduce your EMI outgo. While a lower loan tenure leads to higher EMIs, it also results in lower interest cost and vice versa. Consider prepaying loan if you have surplus funds. However, while doing so, ensure that your overall savings in interest payout exceeds the prepayment cost levied by the lender.
3. Do not enquire multiple lenders within a short time span
Every time you make a credit application, lenders evaluate your credit report to understand your creditworthiness. Such requests are treated as hard enquiries for which credit bureaus reduce a few points from your credit score. Instead, visit online lending marketplaces as loan enquiries made through them are considered as soft enquiries and do not impact on your credit score.
4. Ensure timely repayment of your credit card bills and existing loans
Defaults and delays in making loan or credit card repayments not only attract penalties but also adversely impact your credit score. Credit scores of 750 and above have higher loan and credit card eligibility. Of all the factors considered by the credit bureaus for calculating your credit score, your past repayment history is believed to get maximum weightage. Any delays or defaults in loan or credit card repayment are directly reported to the bureaus by the lenders, which then reduce your credit score. Likewise, timely repayments are seen favourably by the lenders and bureaus, which lead to steady increase in your credit score.
5. Monitor guaranteed or co-signed loan account
Guaranteeing or co-signing loan accounts make you equally responsible for their timely repayments. Any delinquency or default by a primary borrower also adversely impacts the credit score of the co-signor or guarantor. Hence, make sure to keep a close eye on loan accounts guaranteed or co-signed by you.
6. Fetch your credit report at regular intervals
Credit reports may contain incorrect information due to clerical errors on part of the lender or the bureau. Your credit report will also include unauthorised credit applications or transactions made in your name. Such incorrect information can adversely impact your credit score and thereby, your loan eligibility. Reviewing your credit report at periodic intervals would help you to identify and rectify these issues. A rectified credit report will automatically increase your credit score.
7. Maintain adequate emergency fund
Emergencies such as job loss, severe illness, etc can come unannounced and disrupt your income. Lack of financial cushion will either force you to default on your loan EMIs or redeem existing investments meant for your crucial financial life goals. Hence, try and maintain an emergency fund covering at least 6 times of your mandatory monthly expenses including your daily expenses, existing EMIs, insurance premiums, children’s education expenses, etc. Increase the size of your contingency fund by at least 6 times of your expected loan EMI as soon as you begin to plan the new loan.
As financial emergencies can strike any time, park your funds in high yield savings account, ultra-short duration or liquid funds. These instruments yield higher returns when compared to regular savings account and offer higher level of liquidity and capital protection when compared to other debt funds.
(By Gaurav Aggarwal, Director & Head of Unsecured Loans, Paisabazaar.com)