With the economic fallout caused due to the pandemic many people are struggling with their finances and are in need of money to manage their livelihood. In such situations getting an instant personal loan online comes in handy, being an unsecured type of loan there is no requirement of collateral. However, lenders have a set basic eligibility criteria for personal loans. The lenders consider the borrower’s credit history and capability to repay the loan. This is also the reason the interest rate on loans offered by the same lender to two different borrowers may vary. Most lenders also have a personal loan eligibility calculator where you can check with your eligibility for a loan and apply for it accordingly. To ensure a smooth application process even as a first time borrower here we have four ways to improve your personal loan eligibility.
- Avoid Applying for Multiple Enquiries
When you apply for a personal loan, lenders raise an inquiry with a credit bureau to assess your credit history and default risk based on your past credits. Such enquiries are considered as hard enquiries and these get displayed on your credit report too. When the lenders find multiple hard inquiries they will see you as a high-risk applicant and you have higher chances of getting your loan application rejected.
- Wait for 6 Months Before Reapplying for Another Loan
It is better to have a gap of at least 6 months between your current and previous loan applications. If you apply for a loan before that your lender will doubt your ability to repay the loan. If you do not require immediate funds to avail the personal loan, you can wait a few months before you apply to have a better chance of loan approval. On the other hand, having a 6 months gap between your loan will help your case and get loan approval.
- Check your Credit Score
To increase your eligibility for a loan it is necessary to have a good credit score. A credit score ranging between 750 to 900 is considered an excellent score for loans. The banks, NBFCs and other financial institutions prefer candidates with such a credit score. If your credit score is good, you can be assured that you will be eligible for any credit product. A score lower than 750 suggests that you are not responsible with your loan repayments for past or any ongoing credits. This lender may categorise you as a high-risk applicant and may charge you with a higher interest rate or outright rejection of your personal loan application.
- Maintain your Debt-To-Income Ratio
Ideally, you should not be spending more than 40% of your income toward your personal loan EMIs. So, if you earn Rs. 25,000 a month you should ideally be spending not more than Rs. 10,000 on EMIs. Your EMI debt divided by your gross monthly income or salary is your debt-to-income ratio. You need to keep the debt-to-income ratio as low as possible, meaning do not borrow funds unless you really need it. Most lenders won’t approve loans to borrowers whom they don’t see as someone who can afford to repay or seem creditworthy.
- Get a Co-applicant for your Loan
A co-applicant is an additional person considered in the underwriting and approval of a loan application. Applying for a loan with a co-applicant can help to improve your chances of getting a loan and you might also get access to more favorable loan terms. The lender will consider the credit scores and credit history of both the applicants in their approval decision. If you fail to fulfill the loan eligibility criteria, getting a guarantor for the loan is a great option as doing this will make your loan process easier. A borrower has an option to get a co-applicant or co-applicants to improve his/her loan eligibility. With a guarantor you can reduce the credit risk for the lender as the co-applicant too becomes equally liable for the timely loan repayments. If the original borrower defaults on the loan the co-applicant will be responsible to make repayments towards the loan.
- Assess your loan EMI Repayments
Most financial institutions prefer total EMI liability, including the new loan that you are applying for to be less than 50 per cent of your monthly income. So, if the total loan EMI amount is exceeding 50 per cent mark then it lowers your chances of a personal loan approval. A personal loan is quite helpful in many ways but it is still a debt that needs to be repaid at some point of time. Hence, before you apply for a loan check whether you can really afford the loan in the first place. Doing so will help you get a clear understanding of your income and the debt repayments and ensure smooth EMI payments towards your loan. You can also use a personal loan app to manage your EMI payments.
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