Personal loan is an ideal choice for many to deal with fund shortages and financial emergencies. The loan has quicker disbursal and no end use restriction except for speculative purposes. Its unsecured nature favours borrowers but it also increases credit risk for the lenders. Due to this, lenders are more stringent when assessing a personal loan application.
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Here are a few tips that prospective personal loan applicants can consider to improve their chances of getting loan approval:
1. Maintain a high credit score
After receiving a personal loan application, lenders fetch the applicant’s credit score as a preliminary check to determine his creditworthiness. Those having higher credit scores, i.e., more than 750, usually have higher chances of getting personal loan approval. Those with lower scores may either face rejection or get their loans approved at higher interest rates.
The need for availing personal loans can emerge anytime. Therefore, individuals should practice checking their credit reports regularly. Doing so will give individuals sufficient time to take corrective measures and improve their credit scores, if found low. Timely reviewing their credit reports will also help them identify any clerical errors or incorrect information present in the credit reports. It will also give them time to report these issues to their respective lenders and credit bureaus for rectification. Alternatively, they can also visit online financial marketplaces to check their credit scores and receive free monthly updates. A rectified credit report will improve their scores and thereby, their chances of getting personal loan approval.
2. Keep your loan obligations within 50-55% of your monthly income
Before approving a loan application, lenders want to ensure the applicant has sufficient loan repayment capacity. Hence, they usually approve loan applications of those having their monthly loan repayment obligations, including the EMI of the proposed loan, within 50-55% of their net monthly income. Applicants exceeding the aforementioned limit will have lower chances of getting loan approval. Such applicants can improve their loan eligibility by choosing longer tenures. Doing so will reduce the proposed EMIs and resultantly, will improve the loan repayment capacity of the applicant.
3. Avoid applying with multiple lenders in a short time
Lenders fetch credit reports of applicants from credit bureaus while evaluating their personal loan applications. Credit bureaus consider such lender initiated credit report requests as hard enquiries. With every such enquiry, credit bureaus reduce credit score of individuals by a few points and multiple such enquiries in a short span may lead to sharp decline in their credit scores further, thereby, reducing their chances of getting loan approval. To avoid this, prospective personal loan borrowers should visit online financial marketplaces to compare and apply for personal loan online. Credit report requests raised from such online platforms are considered as soft enquiries and do not impact the applicant’s credit score.
4. Avoid frequent job changes
Lenders also factor in employment stability when assessing an applicant’s loan application. They may reconsider approving personal loan applications of those who change their jobs frequently. Such actions reflect instability in career and in the income, thereby, increasing the credit risk for their lenders. Therefore, some lenders require their salaried applicants to have at least 6 months to 1-year service with their current companies. Hence, those planning to avail personal loans in the near future should avoid changing their jobs to increase their chances of availing the loan.