Lenders consider various factors when evaluating loan applications. Some of these major factors include credit rating, monthly income, job profile, employer profile, etc. loan applicants. Those who do not meet the thresholds set by lenders may have their loan application rejected.
Here are some of the ways to minimize the risk of loan rejection.
Work towards building a good credit score
Maintaining a good credit rating is one of the most crucial steps to improving your loan eligibility. Lenders generally prefer to lend to those with a credit score of 750 and above. On the contrary, those with a lower credit score are seen as lacking credit discipline and, therefore, are more likely to default.
Therefore, those considering loans should focus on building and maintaining a good credit rating by adopting sound financial habits such as timely repayment of EMIs and credit card dues, maintaining their credit utilization rate (CUR) below 30%, maintaining a good credit mix and closely monitoring co-signed or secured loan accounts.
Review your credit report regularly
Credit bureaus calculate your credit score based on information provided by lenders and credit card issuers in your credit report. Therefore, any incorrect information in your credit report due to clerical errors made by lenders or the credit bureau, or due to fraudulent loan or credit card activity carried out in your name may have a negative impact on your credit score and loan eligibility.
Therefore, review your credit file at regular intervals to detect incorrect information and report it to the relevant bureau or lender for rectification. A corrected credit report will automatically increase your credit score.
Compare loan offers from various lenders
The interest rate, processing fees, term, etc. for the same type of loan can differ significantly due to the variation in lenders’ cost of funds and the credit risk assessment of individual loan applicants. Therefore, loan seekers should compare loan offers from as many lenders as possible before making the final loan application.
As many lenders may offer preferential rates or/and other terms and conditions to their existing customers, a potential loan seeker should first directly contact their banks and the lenders with whom they share a deposit relationship and/or existing loan. This should be followed by an approach to online financial markets to compare interest rates and various other loan features offered by other lenders. This would help you get the best deal based on your loan needs and eligibility.
Select tenure based on your repayment ability
Your loan repayment capacity will mainly depend on your monthly disposable income after taking into account the monthly mandatory expenses which include your existing EMIs, insurance premiums, investment contributions towards unavoidable financial goals, etc. Lenders prefer to lend to those with total repayment obligations, including that for their new loan, at less than 50-60% of their monthly income. Therefore, those who exceed the set limit are less likely to get approved for a loan.
Applicants over this limit should try to reduce their loan repayment obligations by paying off or foreclosing some of their existing debt, moving to longer loan terms, and/or making a higher down payment on their new loans. .
Once you know your repayment capacity, go for the shortest repayment term to lower your interest charges. Applying for a loan after knowing your optimal EMI would also reduce the risk of default in the future.
Avoid submitting loan applications to multiple lenders in a short period of time
Each time you apply for a credit card or loan, the issuer/lender requests your credit report from the office to assess your creditworthiness. These credit report retrieves are considered tough requests, each of which can lower your credit score slightly. Therefore, making multiple loan or credit card applications in a short period of time can significantly lower your credit score. Instead of submitting loan applications directly to multiple lenders, approach online financial markets to find out your optimal loan offer available on your credit score, job profile, income and various other employment criteria. eligibility. Although these marketplaces also retrieve your credit report while providing loan options, inquiries made through online financial marketplaces are considered informal inquiries and do not affect your credit score.
Avoid frequent job changes
Lenders view frequent job hopping as a sign of career instability, those who change jobs frequently may have less chance of getting approved for a loan. Therefore, those planning to apply for loans in the near future should avoid changing jobs frequently.
The author is the Senior Manager, Paisabazaar.com.