Personal loans are availed by individuals and used for various purposes such as home renovation, from renovating your house, going on an international vacation, to debt consolidation. They are usually unsecured, meaning you do not have to provide collateral, making them an attractive financing option for customers. However, the risk for lenders is higher, and therefore personal loan interest rates also tend to be high. Moreover, getting approval for personal loans may be difficult.
Here are a few steps you can take to increase your chances of getting a personal loan.
1. Check your credit score before you apply
Your credit score is a measure of your ability to repay the loan. Therefore, the higher your credit score, the better your chances of approval. Ideally, it would help if you had a credit score of above 685 or higher to get approved easily. If you have a lower score, it is better to wait and improve before you approach any bank or NBFC with a personal loan application. You can improve your credit by paying off your existing debt, paying all your bills on time, not maxing out your credit cards, etc.
2. Do not make multiple loan applications
Avoid making multiple loan applications to different lenders, hoping to get approved by at least one of them. This makes you seem desperate for credit, which gives the wrong impression that you need more than one loan to meet your expenses. Additionally, if you do not get approved for these loans, your credit score reduces, making it very hard to get approved for any credit.
Additional Read: 4 ways to get the best personal loan rate
3. Have a gap of a minimum of 6 months between loan applications
It is better to have a gap of at least 6 months between your loan applications. Your lender will otherwise doubt your ability to repay the loan. If your reason to avail the personal loan is non-urgent, wait a few months before you apply to have a better chance of being approved.
4. Choose your lender carefully
It is essential that you do your homework and compares loans before you choose your lender. Even if you must select a lender that specializes in high-risk borrowers due to your poor credit score, you need to be careful. Avoid payday and title loans at all costs. These loans are designed to keep you in permanent debt with their ridiculously high fees. Avoid any offer that seems too good to be true.
5. Be careful of your debt-to-income ratio
Ideally, you should not be spending more than 40% of your income toward EMIs. So, if you earn Rs. 25,000 a month, you should not be paying more than Rs. 10,000 for your EMIs. Your monthly debt divided by your gross monthly income is your debt-to-income ratio. It would be best to keep this as low as possible, meaning do not borrow money unless necessary. Lenders won’t approve loans that you cannot afford anyway.
Lastly, searching and applying online for a personal loan may ease the application process and speed up the approval.
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