Before you apply for a personal loan, ensure that you pay off your existing debts and credit card bills to reduce your fixed debt obligation-to-income ratio.
You may need money for different planned and unplanned expenses, be it a wedding, home renovation, higher education, vacation, medical emergency, or debt consolidation. If you are not financially prepared for it, the cost may drain out your savings, or worse, harm your financial health significantly.
This is when personal loans come in handy. Not only do they offer an ample amount at your disposal, but they also get approved instantly and disbursed within minutes nowadays.
Since they can be excellent sources of finance in times of need, they have become a popular financing option in India today. However, you need to fulfil the lender’s eligibility conditions to qualify for a personal loan.
Reduce Your Debt-to-Income Ratio
Before you apply for a personal loan, ensure that you pay off your existing debts and credit card bills to reduce your fixed debt obligation-to-income ratio. Your current debts and credit card due to amounts may pose you as a credit-hungry borrower and make it challenging to get another loan.
Ideally, the total amount of EMIs you are paying at present should not be more than 30-40% of your monthly income. If it is more than that, pay it off before making a new loan application.
Improve and Maintain Your Credit Score
Since personal loans are unsecured, lenders rely on your credit score to determine your creditworthiness. A credit score of 700 and above by CIBIL can project you as a responsible borrower who remains consistent with the payments. Additionally, loan repayment history of Home Loan/Personal Loan with a good track record of the last 12 months can also add significant weightage. Your chances of approval and getting a higher loan amount significantly increases.
A credit score less than 700 implies that you do not have a clean repayment record, and the lender may quickly reject your loan application or charge a higher personal loan interest rate with lower loan amount eligibility.
Clear your Utility bill, Credit Card payments on time
How punctual you are in paying your credit card bills significantly affects your credit score. In case, you default on any of your credit card bill payments, it could marginally bring down your bureau score value, ultimately affecting your chances of being eligible for a sizable personal loan.
Currently, lenders are lending basis an app and can read a lot of alternate data points through SMS, type of apps being used etc. and give due to weightage to delays in mobile bill/School fees payments.
Therefore, make sure that you clear all your dues in addition to loan EMI’s, Credit Card dues also on time.
Include All Your Income Sources and Variable pay
Lenders also look at your income to measure your repayment capacity. Therefore, while filling up the online loan application form, you must mention not only your regular salary but all your additional income sources as well, including variable pay in the form of bonuses, incentives, include any rental income, part-time income, or anything else.
Doing this will prove to the lender that you are earning enough to make timely repayments.
Apply for joint loans with Spouse
In case, you do have a working spouse, you can even apply for a joint personal loan to increase your loan eligibility as that will increase the overall household income and give much better comfort to the lender.
Correct submission of contact details during the loan application
Submit all your Current and permanent Address details, Current Mobile numbers, E-mail ID correctly while filling the loan application. Please also ensure that the same details are duly verified and also updated across all Social media sites, Bureau, Aadhar linked contact details etc.
These day’s lenders verify authenticity and vintage of all addresses, contact numbers etc. through multiple alternate data sources with help of API’s and triangulate the same through multiple data sources. In case of inconsistency of such information, as provided by you in the loan application, there is a high chance of rejection or downsizing of the loan.
Choose a Long-Term Tenure
At the time of applying for a personal loan, you can either choose a short-term or long-term personal loan tenure. A short term tenure lasts between 1-3 years, whereas a long-term personal loan can be tenured for 3-5 years.
A major advantage of long-term tenure over a short-term personal loan tenure is that the EMI amount gets significantly reduced and also enhances your loan eligibility. This is because, as the tenure extends, the outstanding loan balance gets divided over a longer period.
Do Not Apply for Several Loans at a Time
When you apply for a loan, lenders make a hard inquiry with a credit bureau to estimate your default risk. If you apply for several loans simultaneously, all the lenders will make multiple hard inquiries on your credit report, which will eventually reduce your credit score. Since they will perceive you as a credit-hungry borrower, they may also reject your loan application.
So, it’s better to compare lenders beforehand and apply for one that best fits your requirements and personal loan eligibility.
Find a Lender with the Eligibility Criteria You Can Fulfil
Instead of applying to several lenders only to know that you are not eligible for their loan, check the eligibility conditions of different lenders and find the one with eligibility criteria you can fulfil.
Key eligibility norms to be checked upfront are Age, Income, Monthly income and bureau score cut-off, Working experience, Maximum loan amount and tenors offered etc.
by Kaushik Khanna, Chief Credit Officer, Clix Capital