Building and maintaining a good credit score is one of the most crucial steps in improving loan eligibility.
Lenders consider several factors when assessing loan applications. The main one of them is the credit score, monthly income, job profile and employer profile of the loan seeker. Those who do not meet the thresholds set by lenders may have their loan application rejected. Here are some tips to reduce the risk of loan refusals:
Work towards establishing a good credit score
Building and maintaining a good credit rating is one of the most crucial steps in improving your loan eligibility. Lenders generally prefer to lend to those with a credit score of 750 and above. On the contrary, those with a lower credit score are considered to lack credit discipline and therefore are more likely to default on repayment.
Therefore, those who are considering getting loans should focus on building and maintaining a good credit rating by adopting healthy financial habits like timely repayment of EMIs and credit card dues, by limiting their credit utilization rate (CUR) to 30%, maintaining a good credit mix and closely monitoring co-signed or guaranteed loan accounts.
Review your credit report at regular intervals
Credit bureaus calculate your credit score based on the information provided by lenders and credit card issuers on your credit report. Therefore, any incorrect information on your credit report due to clerical errors made by lenders or the credit bureau, or due to any fraudulent loan or credit card activity carried out on your behalf, may have negatively impact your credit score. This, in turn, can have a negative impact on your loan eligibility.
Therefore, review your credit report at regular intervals. This will give you ample time to detect and report the incorrect information to the relevant office or lender for rectification. A corrected credit report will automatically increase your credit score.
Compare loan offers from various lenders
The interest rate, processing fee, or term for the same type of loan can differ significantly due to variation in the cost of funds for lenders and the credit risk assessment of individual loan applicants. Therefore, loan seekers should compare loan offers from as many lenders as possible before making the final loan application.
As many lenders may offer preferential rates or / and other terms and conditions to their existing customers, a potential loan seeker should first contact their banks and lenders directly with whom they share a deposit and / or loan relationship. existing. This should be followed by an online financial markets approach to compare interest rates and various other loan features offered by other lenders. This would help you get the best deal based on your loan requirements and eligibility.
Select the duration according to your repayment capacity
Your loan repayment capacity will primarily depend on your monthly disposable income after factoring in monthly mandatory expenses, existing IMEs, insurance premiums, and investment contributions towards unavoidable financial goals, among others. Lenders prefer to lend to those who have full repayment obligations, including that of their new loan, within 50-60% of their monthly income. Therefore, those who exceed the set limit are less likely to get loan approval.
Applicants exceeding this limit should try to reduce their loan repayment obligations by prepaying / foreclosing on some of their existing debts, opting for longer loan terms, and / or making a higher down payment for their new ones. ready.
Once you know your repayment capacity, choose the shorter repayment term to lower your interest costs. Applying for a loan after knowing your optimal EMI would also reduce the risk of default in the future.
Avoid submitting loan applications with multiple lenders
Whenever you apply for a credit card or loan, the issuer / lender requests your credit report from the bureau to assess your creditworthiness. Such credit report requests from lenders are considered serious inquiries, each of which may lower your credit score slightly. Therefore, making multiple loans or credit card applications in a short period of time can drastically lower your credit score. Instead of submitting loan applications directly to multiple lenders, go to online financial marketplaces to find out the optimal loan offer available based on your credit score, job profile, income and various other eligibility criteria. While these markets also collect your credit report while offering loan options, requests made by online financial markets are considered indirect requests and do not affect your credit score.
Avoid frequent job changes
Lenders consider the employment stability of salaried loan applicants when evaluating their loan applications. Because lenders view frequent job changes as a sign of career instability, those who change jobs frequently may be less likely to get their loan approved. Therefore, those who plan to apply for loans in the near future should avoid frequent job changes.
The author is Senior Director, Paisabazaar.com
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