Personal loan is one of the most popular forms of credit to meet financial requirements and shortfalls. The loan is disbursed quickly compared to most loan types, has no end-use limit (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 rigorous loan application assessment process compared to secured loan alternatives such as home loans.
Here are four smart ways to improve your personal loan eligibility:
Improve/build your credit score
Lenders generally prefer applicants with a credit score of 750 or higher, as they view them as financially disciplined and less likely to default on their personal loan. Most lenders try to lure these loan seekers by offering personal loans at a lower interest rate.
While lenders may sanction personal loans to those with low credit scores, they charge a higher interest rate on these loans to compensate for the high credit risk involved. Therefore, it is crucial to maintain a good credit rating. However, establishing credit scores can 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 the necessary steps to improve, correct, or maintain them. As consumers have the right to obtain 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 during each financial quarter.You can also check the online financial market for a free credit report as well as monthly updates,” says Sahil Arora, Senior Manager, Paisabazaar.com.
Additionally, following sound financial habits such as paying off your EMIs when due and paying credit card bills on time, monitoring loans secured or co-signed by you, and maintaining a credit utilization rate of less than 30% can help improve and strengthen your credit score.
Assess the affordability of your IME
Lenders prefer to sanction personal loans to applicants with total monthly repayment obligations, including EMI for the new loan, up to 60% of their monthly income. Applicants above this mark are less likely to qualify for a personal loan.
Therefore, before finalizing the loan term and EMIs, applicants should assess their EMI affordability after considering existing EMIs. Personal loan seekers should also consider their mandatory monthly expenses, insurance premiums, monthly investment contributions towards their crucial financial goals, rent, etc. while assessing their EMI affordability.
Avoid applying to multiple lenders in a short period of time
Each time you apply for a loan, the lender retrieves your credit report to determine your creditworthiness. The credit bureaus consider these lender-initiated credit report requests to be difficult requests and lower your credit score by a few points each time. Thus, making multiple loan applications in a short period of time can lead to a significant reduction in your credit score, which negatively impacts your eligibility for a personal loan.
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“Instead of submitting personal loan inquiries or applications directly to multiple lenders, you can visit online financial markets to compare the many personal options available from multiple lenders based on your monthly income, employer, job type, credit score, etc. marketplaces will also retrieve your credit report while offering you various loan options, credit report inquiries they raise are considered informal inquiries and therefore do not impact credit ratings,” Arora advises.
Add a co-applicant
Including the co-applicant(s) in a personal loan application reduces the lender’s credit risk because the co-applicant(s) are also responsible for repaying the loan. Thus, applicants who are less likely to qualify for personal loans due to insufficient income, low credit score, job profile or inadequate repayment capacity can improve their eligibility by adding co-applicants with a better credit profile.
Additionally, adding co-applicant(s) can help you qualify for a higher personal loan amount or shorter term to minimize interest charges, as the income of the co-applicant(s) is also taken into account when assessing the repayment capacity of the loan. However, any default or late repayment of a co-applied personal loan may have a negative impact on the credit rating of the co-borrower(s).