Things to consider while applying for personal loan

Minimal documentation, zero collateral, quick processing and no end-usage restriction on loan proceeds (except for speculation) make personal loans an ideal borrowing option for dealing with situations involving financial shortages and exigencies. Many lenders also offer instant loan disbursal to their select existing customers based on their credit scores and other aspects of their credit profile. However, the unsecured nature of personal loans makes lenders take a cautious approach while assessing personal loan applications. 

Below are some dos and don'ts for applicants to improve the chances of getting their personal loan approval:

Dos

Review your credit reports at frequent intervals

Banks and NBFCs use credit score as one of primary filters to evaluate a personal loan applicant’s creditworthiness. As there is no collateral in a personal loan, it increases the credit risk for a lender. It also makes them more dependent on credit scores to assess the creditworthiness of an applicant. Personal loan applicants with credit scores of 750 and above have higher chances of getting their loan approved as lenders consider them more creditworthy. Thus, applicants should look to maintain credit scores of 750 and above to boost their chances of personal loan approval.

Loan applicants can maintain credit scores of 750 and above by following healthy financial practices like repaying their EMIs and credit card bills by due date, limiting their credit utilization ratio within 30%, monitoring their co-signed and guaranteed loan accounts, maintaining a healthy credit mix, etc.

As credit scores are calculated based on information that lenders and credit card issuers provide to credit bureaus, any clerical error made by these entities or any fraudulent credit transaction/application done in your name can bring down your credit score and thereby, negatively impact your personal loan eligibility. Therefore, you should fetch your credit report at regular intervals. You should also highlight any incorrect information included in the report to the credit bureaus and lenders for rectification. A rectified credit report will reflect a higher credit score.

Select loan tenure based on your repayment capacity

Lenders consider your EMI repayment capacity while assessing your creditworthiness. They also factor in your loan repayment obligations and monthly income while evaluating your repayment capacity. Lenders usually prefer providing personal loans to applicants whose total loan repayment obligations, including the proposed personal loan’s EMI, do not exceed 50% - 55% of their net monthly income. Applicants with a higher proportion of repayment obligations stand a lower chance of getting their personal loan approved. Hence, you must try to limit your total EMI obligations to 50% - 55% while choosing the loan tenure to improve your chances of personal loan approval. 

Compare the personal loan features of different lenders

As many banks and NBFCs are offering personal loans with a wide variation both in terms of interest rates and loan evaluation processes, loan applicants should compare the personal loans features of as many lenders as possible. You should start your loan search by contacting lenders with whom you already have existing deposits, loans or credit cards. Post that you should visit online financial marketplaces to compare personal loans offered by other lenders. Apart from interest rates, you should also compare personal loans based on features like loan amount, processing fee, repayment tenure, prepayment charges, etc.

Don'ts

Submitting loan applications to multiple lenders

Whenever you apply for a loan or credit card, the lender will ask for your credit report from credit bureaus to assess your creditworthiness. Credit bureaus consider a credit report request initiated by a lender as a hard enquiry. Each hard enquiry reduces your credit score by a few points. Hence, making personal loan enquiries from different lenders within a short span of time can significantly reduce your credit score and diminish your chances of getting a personal loan approval.

Instead, you can visit online financial marketplaces to compare personal loan options provided by multiple lenders and apply for the best possible alternative available on your credit profile. Although online financial marketplaces would also fetch your credit report while evaluating your loan applications, such report requests are considered as soft enquiries and they do not affect your credit scores.

Frequent job switches

Most banks and NBFCs look at a loan applicant’s employment stability while calculating their personal loan eligibility. Lenders may consider frequent job-hopping as a sign of career instability and higher credit risk. Hence, loan applicants should try to avoid frequent job changes, especially if they are planning to avail a personal loan in the near future.