Published on March 8th, 2019 | by Guest0
What can you do to increase the chances of approval of a personal loan?
Emergencies always show up in the most unexpected manner. There are times when you might have to face a situation but lack money for the same. A personal loan saves the day in such cases. A personal loan is an unsecured loan and it is not specific to any particular purpose.
So, in case you are opting for a personal loan, you would not be required to provide collateral against the loan. In addition to that, you will also not be restricted to use the loan amount for any stipulated purpose. However, personal loans, being unsecured loans, tend to be of higher risk for the lenders. This leads to higher interest rates on the loan and some difficulty in terms of getting the loan approved.
Discussed below are some tips that will help you increase the chances of your loan application being approved:
1) Having a good credit score:
This is the most important deciding factor for the approval of a loan application. Having a good credit score basically stands for having a good credit history. When it comes to personal loans, the lenders always look for a borrower with lower risk. Having a good credit score vouches for the fact that your credit repayment history such as your existing loans, payment of credit card bills, maintaining a healthy credit card utilisation, etc. are well-balanced. You can follow the steps mentioned below to improve your credit score:
- No overspending: It is always recommended to keep the credit card utilisation at a balanced level. Ideally, if you have an average spending limit of up to about 30%, it helps boost your credit score. Thus, controlling the credit limit is an important factor.
- Paying the dues on time: Make sure you pay the dues on time. Whether it is your credit card bill or an EMI against a loan, paying the credit dues on time helps build a good reputation for yourself and you are considered to be a borrower with lower risk. That makes it easier for the lenders to offer more credit.
- Maintaining a healthy combination of credit: Having a balance in the combination of loans helps in building up a good credit score. Having more secured loans than unsecured loans is usually considered to be more favourable for the credit score. Thus, having a balance between the two types of loans helps in building a good credit score.
- Monitoring a loan account for which you have co-signed as a guarantor: When you sign up as a guarantor for the loan taken by somebody else, you are legally liable to make sure that the payments towards the loan are made on time. If the borrower of the loan fails to make the payments on time it will affect his or her credit history. At the same time, your credit score will also take a hit as you have guaranteed the repayment of the loan on time. Thus, you will be required to check and make sure that the EMIs for a loan (for which you have co-signed as a guarantor) are paid off on time till the end of the loan term.
- Monitoring the joint accounts: It is important to monitor your joint accounts as well as they have a direct impact on the credit history.
- Limiting the credit exposure: Your credit report will reflect the total amount of debt that you have, and this will have an effect on your credit score. Having too many active loans and credit cards will increase your overall debt as well and thus, increase your credit exposure. Closing off old loans before applying for fresh ones will help in maintaining a good score and also increase the chances of the loan being approved.
2) Checking your credit score before applying for a personal loan:
As discussed in the point mentioned above, the credit score plays a deciding role when it comes to determine the approval of a loan application. Thus, you should make sure that you check your credit score before you apply for a loan. The higher the credit score, the better are the chances of your loan application being approved. Usually, the credit score is divided as per the following range:
- 300 to 550 – Poor or Bad
- 550 to 650 – Average
- 650 to 750 – Good
- 750 to 900 – Excellent
If your credit score is at least 600 or more, your loan application might be eligible for approval.
3) Don’t end up being desperate for credit:
We might often make multiple loan applications at the same time. Many people make multiple applications at the same time with multiple lenders. The idea is to get at least one of the applications approved. This is strictly not recommended. Too many applications make you look credit hungry and eventually, that leaves a bad impression of you on the lenders. In addition to that, if your loan application is not approved, your credit score will take a hit. So, if multiple loan applications are rejected, the drop in the credit score will be significant. You would need quite some time to recover that drop in the score.
4) Maintain a healthy Debt-to-Income ratio:
The Debt-to-Income ratio is computed by finding out the quotient of your monthly gross income and your monthly debt liability. Ideally, this ratio should be 40% or less. This means, that you should not be spending more than 40% of your monthly gross income towards EMIs. The lower the Debt-to-Income ratio, the better are the chances of maintaining a good credit score.
5) Cooldown period for credit card and loan applications:
It is recommended that you do not apply for loans too frequently. It is important to have this break in between loan applications as the lenders will have a doubt in regard to your credit repayment capability. This might lead to the rejection of an application. It is also important that you don’t apply for multiple credit cards within a short period as in this case the credit score will take a hit.
Keeping a track of the things mentioned above will help boost your credit score and eventually also help in getting your personal loan applications approved.
A financial analyst with over 10 years of experience David Patel is your go-to guy for all things finance. From changing trends in world economy to concerns related to personal finance, his experience in the field has given him unmatched knowledge about it all