In recent years, India has seen a sharp rise in the number of people taking loans. Besides home loans and car loans, personal loans have also found wide acceptance. Taking loans, however, is not as straight-forward as it seems. Sometimes loan applications are rejected or approved at a very high-interest rate. Whether you are a first-time borrower (with no credit history) or an experienced borrower, it is important to understand what factors influence your loan application so that you have better chances of getting your loan approved.
Here are the tips to get approved for personal loan:
Check your CIBIL score
Look for errors on your credit report and fix them
Consider your FOIR/debt to income ratio
The first thing you must do before applying for a loan is to check your CIBIL score. CIBIL score is your credit score that measures your creditworthiness. This score is calculated based on factors like your income, your credit history, your current debts, etc. While any score above 750 is very good, a CIBIL score of 650 to 750 is also considered to be a safe zone. A score below 650 is low and makes it harder to get loans.
Banks and other lending institutions first check your CIBIL score before moving ahead with your application. The catch, however, is that when banks inquire about your score, it is called a hard credit enquiry. Such enquiry results in a slight reduction in your CIBIL score. If you have a low score and you apply to several banks, each of them will make separate credit enquiries. The result would be a significant decrease in your score. This will further lower your chances of getting a loan approved. Avoid enquiring with banks even if your CIBIL score is somewhere around 650.
To avoid this, know your chances before applying for any loan. If you enquire about your own score, this is only a soft inquiry and will not affect your CIBIL score. Try to maintain your CIBIL score at 650 for easier and faster loan approval. Also, sometimes your credit report may have some inaccuracies. It will be beneficial to get it corrected before the banks enquire. You can request this report online on CIBIL’s website.
Your credit report may have errors that could easily prevent you from getting a personal loan. Credit reporting errors like payments reported incorrectly and closed accounts showing up as open are dangerous as they can reduce your credit score. If you see something that’s incorrect, initiate a dispute with the credit bureau.
Another important factor that banks use to decide on your loan application is your debt to income ratio or Fixed-Obligation to Income Ratio (FOIR). As the name suggests, this ratio indicates how much debt you have as against how much you earn. A lower ratio means you have:
- fewer liabilities
- increased disposable income
- better repaying capacity
- higher chances of approval
Ideally, your debts should not exceed 40% of your income. If your ratio is high, pay off some debts before applying for a new one. Also, do not apply for more money than what you need.
Don’t apply for too many loans or credit cards
Every time you apply for a personal loan or a credit card, the bank makes an inquiry for your credit report. This is registered as a hard inquiry with the credit bureau and gets added to your credit report.
When you apply for several loans at the same time, the banks perceive you as someone who is not able to manage money and is always on the lookout to borrow money.
Before you apply, do your research properly. Compare your personal loan options in advance. Use an EMI calculator to know exactly what your monthly repayment amount is going to be and whether you can afford it. After you have made your decision, apply only for the loan that interests you.
Build and improve your credit history
Building good credit is crucial because personal loan approval depends upon how good your credit history is. Banks assess your eligibility for a personal loan and risk of default by checking your credit history. If your credit history reflects a string of credit card defaults, it lowers your credit or CIBIL score and definitely acts against you.
If you have a low credit score, you need to take measures to improve it to get loan approval at favourable loan terms.
If you don’t have enough credit experience, the banks may not have any clue about how disciplined you are with your repayments. That may get your personal loan application rejected. So, before you apply for a personal loan, consider applying for a credit card first. However, make sure you use your credit card responsibly. Maintain financial discipline and make timely repayments.
Missing to pay your credit card bills shows badly on your credit history. So while having a credit card is very convenient, it can be a double-edged sword if you do not pay back your dues in time. If you think the due amount is too big, convert it to EMIs before it reflects as a missed payment.
Make sure you have a stable history of employment
Most banks look for stable employment history in a candidate before approving the personal loan. You may be rejected even with a credit score of 800 and above, if you have a history of job-hopping, your application is likely to be rejected. If you are on probation, or in-between, it may be one of personal loan rejection reasons.
Consider sticking to a job for as long as possible unless you have valid reasons to quit. That’s the lesson here and the fix too.
Check the minimum age and annual income criteria
Banks have a minimum income and age requirement. If you don’t meet the criteria, your personal loan application is likely to get rejected. So, talk to your lender about minimum income requirement before applying for a personal loan. If you don’t meet the age criteria, don’t apply.
Be thorough in your documentation
A surprising number of loans are rejected because of insufficient documentation. Make sure you keep those salary slips and tax returns safe. Some commonly required documents are:
- Address proof– Aadhaar card, Passport, ration card, rental agreement or utility bill
- Photo identity proof– PAN card, Aadhaar, passport, voters ID card or driving license
- Employment proof– an official ID card, appointment letter or salary slip
- Income proof – At least 3 recent salary slips, bank statements, last three years tax returns.
Be very clear on what documents will be required for a particular loan. Apply for the loan only when you are sure you have all the documents that are needed.
Doing your homework before applying for a personal loan will certainly give you a better chance of getting it approved. Want a personal loan from MoneyTap? Check the eligibility criteria and apply for a personal loan now.