When looking for a personal loan, your credit profile, income stability, employer profile and existing obligations are evaluated closely by lenders. Even small gaps can lead to higher borrowing costs or outright rejection. Here are a few aspects you should consider before you apply for a personal loan.
High credit score
One of the primary metrics of assessment is the credit profile of the borrower. A strong credit profile with a credit score of 760 or above positions borrowers as strong applicants and may help you get the loan at lower interest rates and preferential loan terms. However, a credit score below 700 directly pushes you into the high-cost or rejection bucket.
Reaching the threshold requires consistent and disciplined efforts like repaying dues on time, avoiding multiple loan applications within a short period of time, keeping credit utilisation low and more.
Stable income
Lenders assess mainly two aspects of a borrower — intent and capacity to pay. While the intent to pay is established using the credit profile of the borrower, the capacity to repay is derived from the income of the borrower. Even though the general notion stands that high income supports easy loan approval, contradictions remain. High income may be an important signal, but the stability of that high income matters equally. A consistent, stable income is given preference over a fluctuating high income.
Salaried consumers employed with the central or state governments, large MNCs, reputed private organisations and those with more than a couple of years of stable employment have a more predictable income trend. Lenders perceive it as less risky and may offer loans at lower rates and better terms. On the other hand, an unstable employment record with frequent job hopping can lower your chances of approval.
Existing credit burden
Existing debt obligations can also potentially shrink the room for fresh credit. Lenders prefer applicants to have their debt to obligation ratio within 50-55% including the EMI of the proposed loan. Individuals planning for fresh credit should take their existing obligations into account and bring their debt within the lenders’ preferred bracket to boost their chances of approval. Paying off smaller loans or restructuring existing debt can help bring the ratio within a comfortable range and improve eligibility.
Keep documents ready
Any error or discrepancy in documents may also lead to rejection. Before submitting documents, borrowers should thoroughly review it and correct errors, if any. At the same time, borrowers should update details in the documents, if needed. Before applying, they should keep their employment and income records, bank statements, along with KYC documents such as PAN and Aadhaar ready for submission.
Choose the right lender
Eligibility criteria may vary across lenders. One of the most optimal ways of boosting approval chances involves shortlisting lenders whose eligibility criteria you meet comfortably. Also, don’t forget to check for personalised offers from banks and NBFCs where you have an existing relationship. Comparing loan offers first and selecting the most suitable one not only increases your chances of approval but also limits the number of hard inquiries.
Apply for an optimal amount
One common mistake is applying for the maximum loan amount you are eligible for rather than the loan amount you actually need. Higher loan amounts usually carry higher risk for lenders, thus inviting stricter scrutiny. Applying for a loan amount in line with your repayment capacity and current obligations boost your chances of approval.
(The writer is CEO, Paisabazaar)