Because of instant disbursal of funds, no restrictions on end-usage, minimum documentation and no collateral requirements, personal loans are a preferred credit option during unexpected financial emergencies. Borrowers often fail to pay attention to some of the crucial factors associated with it, while applying for a personal loan, leading to rejection of loan application. Let us comprehend 5 mistakes we must avoid while applying for a personal loan –
Not reviewing your credit report attentively
Lenders check your creditworthiness by fetching your credit report from credit bureaus when you apply for any kind of loan. Your credit score will present how responsibly you have behaved with credit in the past. Usually, a credit score over 750 is considered good and healthy by banks and other institutions. His/her loan application is likely to be rejected if a borrower’s credit score is lower than 750. Some lenders practice credit risk pricing wherein they factor in applicant’s credit score for setting loan’s interest rates. A strong credit score may help you get loan offers at lower interest rates, in that case.
Reviewing your credit report precisely and attentively before submitting a loan application can also help prevent any possible error from getting bypassed, which may pull down your credit score, leading to loan rejection. Ensure to report the errors, if any, to the concerned bureau and lender for getting the rectification done at the earliest.
Submission of direct applications to multiple lenders:
The lenders initiate a credit report request from credit bureaus to evaluate your creditworthiness, as soon as you submit the loan application directly to lenders. Such lender initiated requests are termed as hard enquiries, and each of them gets listed in the enquiry section of your credit report. Due to submitting multiple loan applications within a short span of time can significantly reduce your credit score.
Visit the online financial marketplace to compare and choose the most suitable lender based on your credit score, income and other eligibility parameters, instead of submitting direct personal loan applications. While these marketplaces also fetch your credit report from the bureaus, such requests are considered soft inquiries, which do not impact your credit score.
Not comparing amongst various prospective lenders:
Given that personal loan interest rate can range anywhere between 10.35%-24% p.a., it is sensible to visit online financial marketplaces to compare and opt for the right loan product and lender based on your credit score, income and another eligibility criterion. Do not limit your comparison to just the interest rate. You must also factor in processing fee, prepayment charges and other applicable terms & conditions before zeroing in on any particular lender.
Ignoring your repayment capacity:
Lenders assess repayment capacity by computing your Fixed Obligation to Income Ratio (FOIR), i.e. the proportion of your existing income being consumed in debt repayments. Ensure you opt for a loan tenure whose corresponding EMI keeps your FOIR within this range since petitioners having FOIR within 50-60%(including EMI of the new loan) are usually preferred by lenders. Borrowers with lower repayment capacity can opt for a longer repayment tenure to avail lower EMI amount. Nevertheless, longer tenure would also imply higher overall interest outgo and hence, consider prepaying your personal loan whenever you have surplus funds. Ensure the overall saving in interest cost significantly outweighs the prepayment charges levied by your lender, if any, while doing so.
Ignoring alternative loan options:
Do not ignore alternative loan options, such as secured loan options including top-up home loans, loan against securities, loan against property and loan against FDs. These loans also do not have any end-usage restrictions and usually come with lower interest rates and longer tenure option than a personal loan, just as a personal loan. For instance, existing home loan borrowers can opt for top-up home loans available at interest rates usually as low as 8% p.a. and tenure which may go up to 30 years, depending on the residual home loan tenure. Similarly, those who have sizeable long-term investments can consider availing loans against securities to meet their financial shortfalls at lower interest rates without selling their securities.