A personal loan is the most popular and preferred option to manage finance needs. A hassle-free online application process and instant approval make taking a loan easy. It serves multiple purposes such as paying for medical emergencies, children’s education, or vacations.
Much of its popularity stems from the fact that there is a quick fund disbursal process, no restriction on end-usage, minimum documentation, and no collateral requirement. A personal loan comes with lower interest rates and flexible loan tenure, due to which borrowers are not able to pay attention to crucial factors, which eventually lead to personal loan application rejection.
Here are five mistakes you must avoid while applying for a personal loan.
Ignore reviewing credit card report
Lenders fetch credit reports from credit bureaus like CIBIL to check your creditworthiness. It is more like ensuring that you can repay the loan amount within the decided loan tenure. Your credit report contains information about your previous credit behavior and whether you have defaulted in payments or not.
Usually, a credit report with 750 and above points is considered by lenders, but any number below that leads to the rejection of the personal loan application. Also, a good credit score may even decrease the interest rate, because some lenders practice credit risk pricing while determining interest rates.
So, reviewing your credit report, checking your errors, and rectifying those errors before submitting a personal loan application ensures your loan approval.
Applying directly to multiple lenders
Lenders request a credit report from the credit bureaus to evaluate your creditworthiness when you apply to multiple lenders simultaneously. When lenders initiate requests, they are usually terms as hard inquiries, and they are listed in the inquiry section of your credit report. Now, this can put your credit report at risk as it significantly reduces your credit score.
So, instead of applying directly to multiple lenders, it is better to visit an online financial marketplace to compare lenders based on your credit score, income, and eligibility to avoid affecting your credit score.
Avoid comparing prospective lenders
The personal loan interest rates vary from lenders to lenders. It ranges from 10% to 24% per annum. Therefore, it is prudent to visit an online financial marketplace to compare various prospective lenders to find a lender based on your credit score, income, and other eligibility criteria.
You must also check each lender’s processing fee, prepayment charges, and other hidden costs on terms and conditions before applying for a personal loan.
Ignoring your repayment capacity
Repayment capacity is an important factor for lenders to understand whether you can make on-time repayments. It is generally assessed by computing Fixed Obligations to Income Ratio (FOIR), which is the portion of your income that is being consumed in debt repayments.
Lenders consider applicants with FOIR within 50-60%, including EMI on the new loan. So, loan tenures whose corresponding EMI keep your FOIR within the said range should be your preferred option.
So, if you have a lower repayment capacity, you can opt for longer repayment tenure to avail lower EMI amount, but the catch is that you will have to incur high overall interest.
Ignoring alternative loan options
There are secured loan options such as home loans, loans against securities, loans against property, and loans against fixed deposits. Like personal loans, they also serve multiple purposes and usually come with a lower interest rate and longer repayment tenure.
For instance, home loans can be availed at a minimum of 8% interest rate per annum, and loan tenure can go up to 30 years. People with long-term investment plans can opt for loans against securities to meet financial needs at a lower interest rate.
It is always better to know everything about personal loans beforehand to meet financial needs without putting a burden on your pocket.