For most people, a personal loan is a preferred credit option for dealing with financial shortfalls and emergencies – largely due to its easy accessibility, zero collateral requirement and faster disbursals. Moreover, borrowers can use the loan proceeds for any purpose, except for speculative activities.
However, the absence of collateral increases the credit risk for lenders. This leads them to adopt a more stringent evaluation process for personal loans as compared to its secured loan alternatives. Therefore, if you are planning to apply for a personal loan, it’s important to work on strengthening your eligibility.
3 Tips to Improve Your Personal Loan Eligibility
Here are 3 tips you can follow to strengthen your personal loan eligibility and boost your chances of getting approved – possibly at better terms too.
1. Improve or Build Your Credit Score
Your credit is one of the first things that lenders check when assessing your personal loan application. They use it as a litmus test to determine your creditworthiness. Banks and NBFCs usually prefer sanctioning personal loans to individuals having a credit score of 750 or above. Some lenders even offer lower interest rates to such applicants. This is because people with such high scores tend to practice greater financial discipline and therefore, are less likely to default on their loan payments.
It’s possible to get a personal loan with a lower credit score, however, you’re more likely to be charged with higher interest rates to compensate for the lender’s higher credit risk. This makes maintaining a high credit score crucial for availing personal loans and here are the tips that you should follow to improve your credit score:
- Pay your EMIs and credit card bills on time
- Reduce your credit utilization ratio, especially if you max out your credit card(s) regularly
- Avoid applying for multiple loans or credit cards within short span
- Avoid closing your oldest credit card as a longer credit history helps lenders make credit-related decisions with more confidence
- Keep a mix of secured and unsecured credit in your profile
- Routinely check your credit report and ensure your credit score is high and the information given in the report is accurate.
Note: At Paisabazaar, you can check your credit score online for free and also download customised credit reports from all leading credit bureaus in India. You can also seek expert advice from Paisabazaar’s Credit Advisory Services to improve your credit score. And if you want to understand how your credit actions can affect your credit score, use Paisabazaar’s Credit Score Predictor.
2. Assess Your EMI Affordability
Banks and NBFCs prefer lending to personal loan applicants whose total EMI obligations (including EMI of the new loan) are within 50-60% of their monthly income. EMIs exceeding this limit lowers your odds of availing personal loan. Therefore, before choosing a loan EMI or tenure, evaluate your EMI affordability after factoring in your recurring monthly expenses, insurance premiums, existing loan EMIs, contributions towards crucial financial goals, etc. Use a personal loan EMI calculator to find a repayment schedule that works for you. To reduce your total EMI obligations, you can either borrow less or increase the loan tenure.
Remember: Smaller EMIs lead to longer tenure and higher overall interest cost, whereas, larger EMIs lead to shorter tenure and reduced total interest cost. Striking the right balance will increase your loan eligibility, improve your loan approval chances and reduce the risk of loan default.
3. Compare your Options, Avoid Applying with Multiple Lenders
Every time you apply for a loan, the lender pulls your credit report from credit bureaus as part of its credit evaluation process. Such lender-initiated credit report requests are called hard inquiries and can reduce your credit scores by a few points. Therefore, you should avoid applying with multiple lenders that too within a short period as doing so can reduce your credit score significantly, thereby, reducing your chances of availing personal loans.
Alternative: Instead of applying with lenders directly, visit Paisabazaar.com as it allows you to:
- Check offers from 30+ banks and NBFCs
- Know your chances of approval
- Compare & apply for an offer without triggering a hard inquiry
- Get instant disbursals on pre-approved offers
Final Thoughts
Getting a personal loan isn’t difficult if you follow good financial habits and take measures proactively towards improving your loan eligibility. The aforementioned tips can go a long way in improving your eligibility for personal loan and other loans too. It may also help you in availing lower interest rates and unlocking better loan offers with lenders.
