How to increase your chances of availing a personal loan?

A personal loan helps you in fulfilling any of your short-term financial requirements. However, because collateral or security does not back these loans, lending them is riskier for banks and NBFCs than the secured loan options. Banks and NBFCs follow strict eligibility criteria when assessing a personal loan application to mitigate this risk. To avoid loan rejection at that time, you should take all measures necessary to improve your chances of loan approval. Here are a few tips to enhance your chances of personal loan approval.

Keep your credit score at 750 or more

Lenders use your credit score as a litmus test to determine your creditworthiness. They usually prefer offering personal loans to applicants having credit scores of at least 750 as such applicants tend to practice greater credit discipline. Some banks and NBFCs even fix lower personal loan interest rates for such applicants. On the flip side, applicants having lower credit scores may either get their personal loan applications rejected or get them approved at higher interest rates.

There is no telling when you might need to apply for a personal loan. To avoid loan rejection due to low credit score, you must take all steps necessary to keep your credit score at least 750. To ensure this, you must check your credit score from all credit bureaus regularly. Doing so will give you enough time to take corrective measures towards improving your credit score if found low.

Along with checking your credit score, you should also carefully review your credit report to timely identify any error or incorrect details in the credit report. If there is any such issue, it should be reported immediately to respective lenders and credit bureaus for rectification. A rectified credit report may increase your credit scores and your probability of availing of personal loans.

Try to keep your EMI/NMI ratio within 60%

Before approving a loan, personal loan lenders also check if the applicant has sufficient capacity to repay it. To ascertain this, lenders use the EMI/NMI ratio. This ratio depicts how much of an applicant’s net monthly income goes into servicing his existing loan EMI obligations, including the EMI of the proposed personal loan. Banks and NBFCs usually prefer approving personal loan applications of those having their existing loan EMI obligations, including the proposed loan EMI, within 60% of their net monthly income.

Applicants whose EMI/NMI ratio exceeds this limit usually have lower chances of getting personal loans. If your EMI/NMI ratio too exceeds the aforementioned limit, you can try to reduce it by choosing longer tenures on your proposed personal loan.

Choosing longer loan tenure will reduce the EMI of your proposed loan, which might reduce your EMI/NMI ratio to the acceptable limit and thereby, improve your loan eligibility.

Avoid making multiple loan applications

Whenever you apply for a loan, your lender fetches your credit score from the credit bureau(s) to ascertain your creditworthiness. Such lender-initiated credit report requests are called hard enquiries. Every hard enquiry causes your credit score to drop by a few numbers. Thus, having multiple such enquiries within a short span can cause a sudden drop in your credit score and reduce your chances of getting a personal loan.

To avoid such a case, you should visit online financial marketplaces. At such marketplaces, you can check and compare personal loans offers from multiple lenders. Based on your repayment capacity and the offered terms, you can choose and apply for that personal loan online without affecting your credit score.

Avoid frequent job changes

Lenders usually avoid approving personal loan applications of those who change their jobs frequently. This is because such frequent changes project instability in an applicant’s career and income, which increases the credit risk for the lenders.

Note that personal loan lenders usually prefer approving loan applications of those salaried applicants who have spent at least six months to a year in their current organisations. Therefore, those planning to apply for a personal loan shortly should avoid changing their jobs to boost their chances of securing personal loans.