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Lately, it seems like it’s easier than ever to avail a loan. A spurt in the growth of FinTechs and NBFCs across the country has meant that borrowers have a plethora of choices when it comes to choosing the kind of loan they want, on their terms. Even legacy banks have made inroads into digital lending, introducing processes that minimize paperwork and ensure quick eligibility checks.
However, even though the lending system seems heavily geared towards borrower convenience, there are still times when a loan application may get rejected - around one in four adults were denied a loan in 2020. This could be due to a multitude of reasons - right from a poor credit score to too many simultaneous loan enquiries in a short time period.
Here are different ways in which you, a borrower, can improve your chances of getting your loan application approved.
Maintain a good credit score
This is the first thing a lender looks at when they start evaluating your loan application. Your credit score is a reflection of your past credit history, and maintaining a score of at least 750 can help you avail loans on optimal terms. If it’s lower, there are ways in which you can bring it up. First and foremost, be disciplined when it comes to repaying existing EMIs and credit card debt - delays result in penalty fees that adversely affect your score. Next, customize your credit card limit based on your expenses, in such a way that you don’t max out the limit. Finally, check your credit scores for mistakes before you apply for a loan - sometimes, CIBIL can make mistakes when updating your information (e.g. closed accounts reported as open). Report this to the bureau and upon correction, your credit score could see a significant improvement.
Reduce your debt to income ratio
Your debt-to-income ratio, or DTI, refers to your monthly debt divided by your monthly income. It is used by lenders to assess your borrowing capacity. Increasing your income and paying off debt improves your DTI - and a low DTI shows lenders that your current debts are under control and you are ready to borrow more. So, consider taking up a side hustle or gunning for that promotion at work. As a rule of thumb, remember that loan EMIs should account for not more than 40% of your total income.
Avoid multiple loan applications
A financial crunch can push people to apply for multiple loans across several banks and NBFCs. However, the truth is, that each has visibility into all the applications you’ve made - and multiple applications give the impression that a borrower is in deep financial trouble and may not repay debts on time. In addition, several applications could also mean several rejections, which will have a negative impact on your credit score. A better way to do this would be to do primary research and decide beforehand which lender’s terms are best suited to your needs.
Maintain a healthy mix of credit
Unsecured loans (that don’t require collateral or security), are generally viewed unfavorably when you apply for a loan. This is because they are considered riskier than secured loans - in which lenders have a collateral to monetize in case of default. So it’s always good to maintain a healthy mix of both secured and unsecured loans. Either way though, a large chunk of your credit score is based on your repayment history, so ensure you make your monthly payments on time, no matter the kind of loan.
Choose the right lender
Do your due diligence when choosing a lender for your loan application. Compare interest rates to see what works best for your needs, and check for prepayment facilities. Next, read the fine print for details around hidden charges - remember that most lenders charge 2-3% in processing fees, exclusive of GST.
At FinBox, we work with several banks and NBFCs to ensure that borrowers can avail loans at competitive interest rates and at terms that suit them best.Getting a loan approved isn’t hard - but it requires a certain level of financial discipline. Ensure you’re paying off your existing debts on time, and managing your finances right. That’s half the battle won!