Banks and NBFCs consider several factors to evaluate the creditworthiness of their personal loan applicants. Some of those key factors include applicants’ income, occupation profile, credit score, employer’s profile and existing debts. While personal loan applicants can do very little to improve their income, job or employer profiles to meet the lender’s criteria, there are some areas where applicants can work on to improve their chances of personal loan approval.

Build/maintain your credit score

Lenders usually prefer personal loan applicants having credit scores of 700 and above.

Individuals having such credit scores maintain credit discipline and thus, carry lower credit risk for the lenders. This allows lenders to offer personal loans to such applicants at lower interest rates. While some lenders may approve personal loans to applicants having lower credit scores, such applicants are usually charged higher interest rates to cover the higher credit risk.

Many lenders also offer pre-approved personal loans to their existing customers having a good credit profile. Such pre-approved loans usually have instant or same day disbursal. Thus, having higher credit scores can also increase your chances of getting pre-approved personal loan offers from lenders with which you already have existing deposits/loans and thereby, increase your financial capability to deal with financial emergencies or achieve other financial goals.

While building or improving credit scores can take time, the requirement for a personal loan can arise any time. Thus, individuals should always work towards building/improving their credit scores by following certain healthy credit practices like fetching their credit reports at regular intervals, repaying their EMI or credit card bills by their due dates and by ensuring the timely repayment of the loans guaranteed or co-signed by them.

Fetching credit reports at periodic intervals would allow the individuals to take corrective steps for improving their credit score. It would also allow them to identify inaccurate information or fraudulent credit activities in their name, if any, in their credit reports. Such errors or fraudulent activities should be reported to the credit bureaus for rectification. Rectified credit reports may increase their credit score and thereby, improve their personal loan eligibility.

Keep your EMIs within 50-60% of your monthly income

Banks and NBFCs usually approve personal loan applicants whose total monthly repayment obligations, including the EMI of their proposed personal loan, are within 50-60% of their monthly income. Those exceeding this limit have lower chances of personal loan approval. Note that the lenders also factor in the existing credit card outstanding of their personal loan applicants while evaluating their repayment capacity. Thus, individuals planning to avail personal loans should use online personal EMI calculators to check whether their monthly repayment obligations fall within the aforementioned limit. Those exceeding the limit can opt for longer tenures or opt for a smaller loan amount to reduce their monthly EMIs.

Additionally, personal loan applicants should also factor in their unavoidable expenses like insurance premiums, utility bills, rent, children education expenses, etc and monthly contributions towards their unavoidable financial goals for selecting their optimum loan tenure and EMI.

Avoid loan/credit card applications with multiple lenders within a short span

Whenever a lender receives an application for loan or credit card, the lender fetches the applicant’s credit report(s) from the credit bureau(s) to assess his creditworthiness. Such credit report fetches made by the lenders are considered as hard inquiries by the credit bureaus, which then reduce the credit scores of the loan/credit card applicants by a few points. Thus, making personal loan applications with multiple lenders within a short span can significantly reduce one’s credit score and thereby, reduce his chances of securing personal loan approval. Moreover, those making multiple loan offers within a short span are considered as credit hungry by the lenders, which may further reduce their chances of loan approval.

Compare personal loan offers in online financial marketplaces

The chances of securing personal loans from different lenders can vary widely depending on their credit risk assessment policies. Similarly, the pricing of personal loans too can vary widely across lenders depending on their credit risk pricing policies. For example, some lenders may reject a personal loan applicant for having a credit score of 650 while others may approve his/her loan application by charging higher interest rates to cover the higher credit risk. Thus, applicants should compare the personal loan offers of as many lenders as possible before making the loan application.

Instead of making personal loan applications with multiple lenders, check online marketplaces to compare the best offers, including the pre-approved ones. Doing so would not only save them from the hassle of applying separately with each lender, it would also reduce the risk of reduction in their credit scores due to multiple loan applications, and hence chances of getting a loan subsequently. For example, those failing to get their personal loan approved may apply with more lenders, which would lead to further reduction in their credit scores and thereby, reduce their chances of loan approval. Instead, applying through online financial marketplaces would allow them to get loan offer(s) from all willing lender(s), without risking multiple loan rejection.

Avoid frequent job changes

Lenders usually consider frequent job changes as a sign of instability in one’s career. Thus, applicants having unstable careers are considered to carry higher credit risk, which in turn adversely impact their chances of personal loan approval or may cost them higher rates.

Additionally, many lenders also require their personal loan applicants to have spent at least six months to a year with their present employer. Thus, if you are planning to apply for a personal loan in the near future, try to avoid job switches, to the extent possible, to reduce the risk of personal loan rejection.

Conclusion

As credit score is one of the first filters used for assessing personal loan applicants, one should always work towards maintaining a good credit score. Applicants should also keep their total EMIs, including that of their proposed personal loan, within 60% of their monthly income. And finally, loan applicants should check the personal loan eligibility criteria of as many lenders as possible as their eligibility criteria and loan evaluation process can vary widely depending on their credit risk policies. The best way to do so is to visit online financial marketplaces, which would help you access various personal loan options available based on your need and credit profile aspects like credit score, income, employer etc. This would also save you from the hassle of making multiple loan applications while also eliminating its adverse impact on your credit score.

(The writer is Chief Business Officer (Unsecured Lending) Paisabazaar)

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