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 a 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. Since most of us will need to take a loan at some point in our lives, understanding what factors influence your loan application can be very helpful.
Here are 6 tips that can help you to make a successful loan application.
Check your CIBIL score
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 your score, it is called a hard credit enquiry. Such an 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 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 an 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 for this report online on CIBIL’s website.
Improve your Credit History
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. If your CIBIL score is between 650 and 700, find out how you can improve it. Here’s an article that can give you some points to get started with.
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- 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.
Approach Your Primary Banker
Relationships management is a prime focus for banks these days. Chances are you may already have a relationship manager assigned to you by your primary bank. It is a good idea to first approach your own bank with a loan request. They will be more committed to giving you the best deal they can. Retaining customers is a very serious matter for banks and thus your primary bank will be your best bet when seeking a loan.
Debt to Income Ratio
Another important factor that banks use to decide on your loan application is your debt to income ratio. As the name suggests, this ratio indicates how much debt you have as against how much you earn. Ideally, your debts should not exceed 40% of your income. If you feel your debt to income ratio is higher than this, pay off some debts before applying for a new one. Also, do not apply for more money than what you need.
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Look For a Good Referral
If you do not have a favourable credit history, you can improve your chances further by getting a good referral. This referral should have a sound history with the bank. Banks will surely take note if the referral is a dependable customer.
Doing your homework before applying for a loan will certainly give you a better chance at getting it approved. Part of your homework also involves checking your CIBIL score is above 650. Make sure you start early to buy you some time in making corrections where needed.