Personal loans come with no-end usage restriction (except for speculative purposes), minimal documentation and quick disbursal, thus making it ideal for dealing with both planned expenses and financial exigencies. Although the unsecured nature of this credit instrument favours borrowers, it increases the credit risk for lenders offering this loan. The increased risk of default on personal loans makes lenders take a more cautious approach while assessing personal loan applications.
Here are a few tips that prospective applicants should consider to increase their chances of getting personal loan approval:
Maintain high credit scores
Personal loan lenders fetch the credit score of their applicants as a preliminary check to determine their creditworthiness. Loan applicants having credit scores of 750 and above usually have higher chances of getting their personal loan applications approved. Lenders may either reject personal loan applications of those having lower credit scores or offer them personal loans at higher interest rates.
As your need for availing personal loans can emerge anytime, you should fetch your credit reports from the credit bureaus on a regular basis. Alternatively, you can also visit online financial marketplaces to check your credit scores. Doing so will give you sufficient time to review your credit report and check for any clerical errors or incorrect information present in your report. Any errors in your credit report should be reported to both your lender and the concerned credit bureau for rectification. A rectified credit report will not only improve your credit score but it will also increase your chances of getting a personal loan at lower rate of interest.
Personal loan applicants can also improve their credit scores by repaying their EMIs credit card bills within the due date. Credit bureaus give the highest weightage to an individual’s repayment history while calculating his credit score. Thus, failure to pay EMIs/credit card bills by their due date may end up reducing their credit scores, which in turn would reduce their eligibility to avail loans or credit cards in the future.
Keep your debt obligations restricted to 50-55% of your monthly income
Personal loan lenders want to ensure that their applicants have sufficient repayment capacity before approving their loan applications. Hence, lenders usually sanction personal loans for individuals whose monthly loan repayment obligations, including the EMI of the proposed loan, are within 50-55% of their net monthly income. Lenders may either reject the loan applications of those exceeding the aforementioned limit or approve their personal loans at higher interest rates. Such loan applicants can improve their personal loan eligibility by choosing longer repayment tenures and/or lower loan amounts. Doing so will reduce the EMI of their proposed personal loan and thereby, bring their total monthly repayment obligation within the aforementioned limit.
Avoid applying with multiple lenders in a short time
Lenders fetch the credit reports of their personal loan applicants from the credit bureaus while evaluating their loan applications. Credit bureaus consider such credit report requests initiated by the lender as hard inquiries. With every such hard inquiry, credit bureaus reduce the credit score of individuals by a few points. Multiple such inquiries within a short span of time may lead to a sharp decline in the credit scores of loan applicants and thereby, reduce their chances of getting personal loan approval. To avoid this, prospective borrowers should visit online financial marketplaces in order to compare and apply for personal loans online. Credit bureaus consider any such report request raised from online financial marketplaces as soft inquiries, which have no adverse impact on the loan applicant’s credit score.
Avoid frequent job changes
Lenders also consider the employment stability of their personal loan applicants when assessing their loan eligibility. They may reject the personal loan applications of individuals who change their jobs frequently. Frequent job changes reflect the career and income instability of loan applicants, which in turn, increases the credit risk of the lenders. Therefore, some lenders require their salaried personal loan applicants to have minimum of 6 months to 1-year of service in their current organisation. Hence, prospective personal loan applicants should avoid changing jobs frequently to improve their chances of availing the loan.
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