Borrowers who apply for personal loans frequently overlook some of the most important aspects of the process, resulting in loan application rejection. Let’s have a look at five pitfalls to avoid while applying for a personal loan:
- Failing to check your credit report
Some lenders use credit risk pricing, which involves taking into account an applicant’s credit score when determining loan interest rates. A good credit score can help you acquire loan offers with reduced interest rates in that situation.
Lenders examine your creditworthiness whenever you apply for a loan by pulling your credit record from credit bureaus. Your credit score reflects how you have used credit responsibly in the past. Banks and other financial organisations usually consider a credit score of over 750 to be healthy. A borrower’s loan application is likely to be refused if her credit score is less than 750.
- Making direct applications to a number of lenders:
When you submit a loan application to a lender directly, they obtain a credit report from credit agencies to assess your creditworthiness. Hard enquiries are requests initiated by a lender, and each one is recorded in the inquiry section of your credit report. Multiple loan applications in a short period of time will lower your credit score dramatically.
Instead of applying for a personal loan directly, go to an online financial marketplace to evaluate lenders and choose the best one for you based on your credit score, income, and other eligibility criteria. While these marketplaces have their own set of advantages, they also have their own set of disadvantages.
- Not comparing offers from other potential lenders:
Given that personal loan interest rates can range from 10.35 percent to 24 percent per annum, it’s a good idea to use online financial marketplaces to compare and select the best loan product and lender depending on your credit score, income, and other criteria. Make sure you’re not just comparing interest rates. Before deciding on a lender, you should consider the processing fee, prepayment penalties, and other relevant terms and conditions.
- Ignoring your ability to repay:
Lenders determine your repayment capacity by calculating your Fixed Obligation to Income Ratio (FOIR), which is the percentage of your current income spent on debt repayments. Because lenders prefer applicants with a FOIR of 50-60% (including the new loan’s EMI), make sure you choose a loan duration whose corresponding EMI puts your FOIR within this range. Borrowers who have a reduced repayment ability can choose a longer repayment period to get a lower EMI. However, because a longer term means a greater overall interest outlay, try prepaying your personal loan anytime you have extra cash. While doing so, make sure the ove is in good condition.
- Failure to consider other loan options:
Alternative lending possibilities, such as top-up house loans, loan against stocks, loan against property, and loan against FDs, should not be overlooked. These loans, like personal loans, have no limits on how they are used and frequently have lower interest rates and longer terms than personal loans. Existing house loan customers, for example, can take advantage of low-interest top-up loans.