Summary of this article
Lenders prefer to give personal loans to applicants whose total monthly loan payments, including new loan EMIs, stay below 60 per cent of their total monthly income. Personal loan applicants who have monthly loan repayments exceeding this threshold face decreased chances of getting their loan approved.
Personal loans represent one of the widely-used credit options for managing urgent financial requirements and short-term deficits. The disbursement process for this loan is faster than other loan types, while the funds can be used for any purpose, except speculation. Personal loans also do not need any collateral or security for approval and disbursal.
The absence of any collateral makes personal loans more risky for lenders. As such, the evaluation process for personal loan applications becomes more stringent because these loans lack the security of secured loans, such as a home loan or a car loan.
Here are four ways in which you can increase your eligibility for personal loans.
Improve Your Credit Score
Lenders prefer to give personal loans to applicants who maintain credit scores of 750 or higher because they view these applicants as responsible borrowers who have a low probability of defaulting on their personal loan payments. The majority of lenders focus on obtaining loan applicants who possess good credit scores and also provide them with personal loans at favourable rates of interest.
The approval process for personal loans also exists for people with bad credit score, but lenders impose elevated interest rates on such loans to offset the high credit risk. Maintaining a good credit score remains essential. Building credit scores takes time, but the need for a loan may arise anytime.
The process of improving your credit score begins with regularly checking your credit reports, which will help you identify areas for improvement and take necessary corrections and maintenance actions. Consumers can obtain free credit reports from each of the four credit bureaus during every financial quarter as per their rights to receive a free report once annually.
Your credit score will improve if you consistently pay your equated monthly instalments (EMIs) on time, pay your credit card bills promptly while monitoring loans you co-sign or guarantee, while maintaining your credit utilisation ratio below 30 per cent.
Determine Your Ability To Make EMI Payments
Lenders prefer to give personal loans to applicants whose total monthly loan payments, including new loan EMIs, stay below 60 per cent of their total monthly income. Personal loan applicants who have monthly loan repayments exceeding this threshold face decreased chances of getting their loan approved.
Applicants need to assess their ability to pay EMIs after considering their current EMIs before selecting loan terms and monthly payment amounts. When applicants evaluate their EMI affordability for personal loans, they need to include their essential monthly expenses together with insurance premiums, investment amounts, rent payments, and other vital financial targets.
Don’t Make Multiple Loan Inquiries
A loan application triggers the lender to retrieve your credit report for evaluating your credit standing. The credit bureaus identify lender’s credit report requests as hard inquiries, thus lowering their credit score by several points with each request. Applying for multiple loans in brief succession will significantly lower your credit score, which will decrease your chances of obtaining a personal loan.
So, instead of doing this, you can browse financial marketplaces online to evaluate different personal loan options from multiple lenders. The financial marketplaces will retrieve your credit report during the offering process of different loan options, but the credit report requests they generate get classified as soft inquiries that do not affect credit scores.
Add A Co-Applicant With Better Credit Profile
Adding a co-applicant to your personal loan application minimises the lender’s credit risk because the co-applicant shares the responsibility for loan repayment. People who face challenges in obtaining personal loans because of low income, poor credit scores or insufficient repayment capabilities can boost their eligibility by adding co-applicant(s) with better credit profiles during the loan application process.
The addition of co-applicant(s) allows you to get a larger personal loan or shorter repayment period, which reduces your interest expenses, because the lender evaluates your loan repayment capacity based on both yours and your co-applicant’s income.
