A personal loan is one of the most convenient and preferred financing tools. With instant approval and disbursal facilities through online loan apps, a personal loan can address your emergency as well as aspirational needs. Be it a financing, a medical crisis, or fulfilling your travel aspirations, making a high-end purchase or meeting your wedding expenses, a personal loan can come to your aid. However, a personal loan is an unsecured loan. That means you do not need to put up collateral to get the loan. This makes personal loans high-risk lending instruments and the lender checks for several parameters to ensure repayment capability and repayment attitude of the borrower.
Some of the important deciding factors that impacts your personal loan approval are – your credit score, monthly income, income-to-debt ratio, the amount you are applying for, the tenure of your loan, and your EMI affordability.
Here are a few amazing expert tips that will help you improve your personal loan eligibility, lower your chances of loan rejection and may help you get the best deals on loan interest rates.
Tips for Improving Your Personal Loan Eligibility!
- Improve your credit score
Your credit score is the first thing that any lender will check before considering your loan app. The credit score is a reflection of your borrowing history and your repayment habits. If you have never availed a loan or used a credit card, your credit score would be reflected as N/A. In such cases, the lender would look into the other parameters more closely. For those who diligently pay off their EMIs on time, they have a very good credit score. Such borrowers are lender’s favourite; you might even get a discount on the interest rates. In case, you have defaulted on your loan EMIs or credit card bills, your credit score might be poor. In such cases, you can either apply for the loan with a co-applicant or avail the loan at high interest rates.
- Pay off your existing debts
If you are planning to avail a personal loan, then it would be a smart idea to pay off your existing debts that are within your budget. Consider paying off your credit card bills or foreclose your car loan if only a few instalments are left. This again depends on your financial situation and budget. Also, avoid using multiple credit cards and you can consider consolidation of your loan accounts if you are paying multiple EMIs. If you have multiple existing loans, the lenders may consider you a risky borrower. You can talk to a financial advisor or do your research online, to understand the benefits and steps for consolidating your loan. Keeping your debts to a minimum will improve your debt-to-income ratio which is another crucial parameter for personal loan eligibility.
- Reduce your debt-to-income ratio
Your debt-to-income ratio is your gross monthly debt divided by your gross monthly income. Ideally, your debt combined with your monthly expenses should not be more than your monthly income. If you have a very high debt, then the lenders may consider you a risky borrower and they may reject your loan application. Let’s understand this with an example. If you have an existing car loan EMI of 13,000 each month, and your monthly income is Rs. 25000 then your debt-to-income ratio would be (13,000 / 25,000) = 0.52 = 52%. In this case, the liabilities are much higher. For easy loan approval, your debt-to-income ratio should not be more than 25 to 30 per cent. The lower this number, the better is your eligibility.
- Include all sources of your income
Your income is one of the most important factors that the lender would consider before approving your loan. Of course, the rule is simple here. The higher your income is, the better is your chances of getting the loan approved instantly. For this purpose, you might consider mentioning all your income sources, not just your salary. If you have a side hustle, be it a small business or freelancing, mention it in your loan application. Having multiple sources of incomes makes you a low-risk borrower; you can also negotiate on your loan interest rates based on this factor.
- Add a co-borrower to your application
Another simple yet very effective way of improving your personal loan eligibility is by adding a co-borrower to your application. Adding a co-applicant in your loan application lowers the credit risk for the lenders. This is because the liability gets divided between the two; the co-borrower is equally responsible for timely repayment of the loan. So, if you have a poor credit score, low income, inadequate repayment capacity, then you can improve your personal loan eligibility by adding a co-borrower. Also, having a co-applicant can help you get a larger loan amount or a shorter loan term as per your convenience. Make sure your co-borrower has a stable source of income and a good credit score.
- Opt for a longer tenure
One of the best features of a personal loan is the flexible repayment tenure. Most lenders typically provide an extended tenure of up to five years to repay your loan amount. A longer tenure means significantly lower EMIs which make it very pocket-friendly for you. So, before applying for your loan, visit the online website of your lender, or download an online personal loan app to calculate your monthly EMIs by adjusting your borrowing amount and tenure of loan. Check the EMI against your debt-to-income ratio. Make sure to apply for an amount and tenure that do not make your debt-to-income ratio exceed 35%. Keeping the EMI low, also minimizes the risk for the lender.
- Avoid applying for multiple loans at a time
This is one of the most common mistakes that people make while applying for a loan. They apply for the loan from multiple lenders at a time, just to check the eligibility or compare the offers. But this is a big mistake. The credit bureau keeps a tab on how many loans a person has applied to in the recent past, irrespective of whether it was approved or not. If you have applied for multiple loans, your credit score gets affected. The simplest way to avoid this is to go through the terms and conditions of the loan offered by different lenders. You can start by checking the eligibility criteria and then find out the best interest rates offered by those lenders.
- Apply at a lender with a simple eligibility criteria
If you are worried about not meeting the eligibility criteria, then apply at a bank with minimum personal loan eligibility criteria. This will increase your chances of getting the loan approved. There are several online loan apps that offers instant personal loan with minimum documentation and has very simple eligibility requirements. If your loan requirement is about Rs. 1.5. Lakhs, then going for these online loan apps could be your best bet.
- Submit the correct details
Finally, this is the most crucial thing that you need to keep in mind while applying for a personal loan. Fill your loan application diligently and make sure you have all the necessary documents handy while applying for the loan. Cross check your current address, permanent address, mobile number, email-id, salary, company name and other details that you fill in the form. All of these details will be duly verified. In case of any discrepancy your loan application will be rejected. This will negatively impact your credit score. You can avoid all of this by furnishing the right details.
Applying for a personal loan has become simpler than ever. However, you still need to meet the eligibility criteria mentioned by the lender. You can check out the websites or visit the branch or download an online loan app to check their eligibility criteria and apply with the one that best suits your profile.