Personal loan is one of the most popular forms of credit to deal with financial exigencies and shortfalls. The loan is disbursed quickly as compared to most loan types, has no limitations on end usage (except for speculative purposes) and requires no collateral. However, the absence of any collateral increases the credit risk for the lender. This results in a more stringent evaluation process of the loan application as compared to secured loan alternatives such as home loans.
Here are four smart ways to enhance your personal loan eligibility:
Improve/build your credit score
Lenders usually prefer applicants with credit scores of 750 or higher because they consider them to be financially disciplined and less likely to default on personal loan repayment. Most lenders try to attract such loan applicants by offering personal loans at a lower interest rate.
While lenders may sanction personal loans to those with low credit scores, they levy a higher interest rate on such loans to compensate for the high credit risk involved. Hence, it’s crucial to maintain a good credit score. However, building credit scores may take time and the need for a loan can arise at any time.
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“Applicants can improve their credit scores by developing the habit of checking their credit reports at regular intervals and taking necessary actions to improve, rectify or maintain it. As consumers are entitled to get a free credit report once a year from each of the credit bureaus, you can access a free credit report from each of the four credit bureaus in each financial quarter. You can also check out the online financial marketplace for a free credit report along with monthly updates,” says Sahil Arora, Senior Director, Paisabazaar.com.
Furthermore, following healthy financial habits like repaying your EMIs by the due date and credit card bills on time, monitoring loans guaranteed or co-signed by you, and keeping a credit utilization ratio within 30% can help in improving and building your credit score.
Assess your EMI affordability
Lenders prefer to sanction personal loans to those applicants having total monthly loan repayment obligations, including EMI for the new loan, within 60% of their monthly income. Applicants exceeding this mark have fewer chances of availing a personal loan.
Therefore, before finalising the loan tenure and EMIs, applicants should evaluate their EMI affordability after factoring in existing EMIs. Personal loan applicants should also consider their mandatory monthly expenses, insurance premiums, monthly investment contributions towards their crucial financial goals, rent, etc while evaluating their EMI affordability.
Avoid submitting enquiry with multiple lenders within a short span
Whenever you apply for a loan, the lender will fetch your credit report to determine your credit worthiness. Credit bureaus view such lender-initiated credit report requests as hard enquiries and reduce your credit score by a few points on each instance. Thus, making multiple loan applications within a short span can lead to a significant reduction in your credit score, thereby negatively impacting your personal loan eligibility.
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“Instead of submitting enquiries or personal loan applications directly with multiple lenders, you can visit financial marketplaces online to compare the numerous personal options available from multiple lenders based on your monthly income, employer’s profile, employment type, credit score, etc. While these financial marketplaces will also fetch your credit report while offering you various loan options, credit report requests raised by them are viewed as soft inquiries and hence, do not impact credit scores,” informs Arora.
Add a co-applicant
Including co-applicant(s) in a personal loan application reduces the lender’s credit risk as the co-applicant(s) are also liable for loan repayment. Thus, applicants having lower chances of availing personal loans due to inadequate income, low credit score, employment profile or inadequate repayment capacity can improve their eligibility by adding co-applicant(s) with a better credit profile.
Further, adding a co-applicant(s) can help you avail a higher personal loan amount or shorter tenure to minimise interest costs, as the income of the co-applicant(s) is also considered while evaluating the loan repayment capacity. However, any default or delay in repayment of a co-applied personal loan can have a negative impact on the credit score of the co-borrower(s).