Personal loan is a kind of loan one avails to meet their personal requirements. This can include funding a wedding, vacation, medical emergency etc. A personal loan is also referred to as an unsecured loan since one does not have to put up any collateral like house or car. The risk associated with such loans is high as the lending institution has no guarantee whether the borrower is going to repay the loan. On account of the increased risk involved, interest rates are higher compared to secured loans.
Given that there exists the risk of non-repayment, banks and other financial institutions scrutinize the loan applications they receive and only accept those that have an excellent credit profile. If you are planning to apply for a loan, here are a few points to keep in mind to improve chances of your loan application getting approved:
- Maintain excellent credit score
Before you send your application, you need to make sure you have a credit score of at least 750. The closer the figure is to 900, the better chances you will have of getting the nod for your loan application.
The three-digit figure tells a lender how risky you are as a client. Financial institutions consider applicants with a poor credit score, say below 650, as high-risk customers and are most likely to deny them loans. So before you apply for a personal loan, you must see to it that you have an excellent credit score to show.
In order to improve your credit score, you need to ensure that you always pay your bills on time. Delaying or missing payments can hurt your credit score. Also, you must strive to maintain a low credit utilization rate. The lower your credit utilization, the better your credit score rating will be.
- Check credit report for errors
Credit reports, which contain details about a person’s borrowing history, play a big role in the loan application process.
When you apply for a loan, banks and other financial institutions run an inquiry on your credit report. Lenders determine whether or not to lend depending on what they see in the report. Any error that may have crept in your report reduces the possibility of loan approval. Whenever you spot an error in the report, raise a CIBIL dispute with the credit bureau. If the dispute is found valid, the rectification will be made in a matter of thirty days. It is advised that you check your credit report at least three times a year to make sure that it is free of all discrepancies.
- Refrain from applying for too many loans
You may feel like applying to numerous banks at the same time to increase the chances of being approved for a loan. Doing so however, is a big mistake one can make. Not only does it negatively impact your credit score, you also portray yourself as a credit hungry customer. This does not go well with lending institutions and they will deny you a loan. Only apply to those institutions that you are sure will approve your loan application.
- Apply for the right amount
When you apply for a high loan amount that is unsecured there is a strong possibility that your application may be turned down. The maximum amount you can borrow usually equals to a specific portion of your income. It is therefore a good idea to use a loan eligibility tool to determine the amount you will be eligible for and can also afford. When an application is made for an amount that you are capable of repaying, the lender might extend you the required amount.
- Show good savings record
Besides having a good credit score and a stable job, a good savings record can help you move one step closer to getting that loan amount from the bank. When you are able to save some money from your earnings and invest the same into an account every week or every month, you are demonstrating that you can take care of regular loan repayments.
As you can see above, having a good credit profile is necessary if you want a bank to lend you a loan. Now when you shop around for a personal loan, conduct your own research and only avail one from an institution of repute. Compare the different interest rates of lenders and look up reviews online. Only proceed ahead once you are sure that the financial institution is trustworthy.
There are many shady lenders who guarantee loan approval but hide the hidden fees. Beware of such lending institutions. Personal loans are a great tool to help meet your personal needs. However, if you do not practice financial discipline, you may land in a debt trap. Taking a loan is a big step. Hence it is advised to only take one when you are confident about being able to repay back the entire sum on time along with the interest charges and other fees.