5 mistakes to avoid before applying for a personal loan
By Naveen Kukreja, CEO and Co-Founder, Paisabazaar.com
Quick disbursement of funds, no restrictions on end use, minimal documentation and no collateral requirement make personal loans a preferred credit option during unexpected financial emergencies. When applying for a personal loan, borrowers often fail to pay attention to some of the crucial factors associated with it, resulting in rejection of the loan application. Let’s look at 5 mistakes we must avoid when applying for a personal loan –
1. Not reviewing your credit report
Whenever you apply for a loan, lenders check your creditworthiness by getting your credit report from the credit bureaus. Your credit score represents how responsibly you have behaved with credit in the past. Usually, a credit score above 750 is considered healthy by banks and other institutions. If a borrower’s credit score is below 750, their loan application is likely to be rejected. Some lenders charge credit risk taking into account the applicant’s credit rating when setting loan interest rates. In this case, a good credit score can help you get loan deals at lower interest rates.
Examining your credit report before submitting a loan application can also help avoid possible mistakes, which could lower your credit score and lead to loan rejection. Be sure to report errors, if any, to the appropriate office and lender so that the correction can be made as soon as possible.
2. Submit direct requests to multiple lenders:
As soon as you submit a loan application directly to the lenders, they initiate a request for a credit report from the credit bureaus to assess your creditworthiness. Such requests initiated by the lender are referred to as firm investigations, and each of them is listed in the investigation section of your credit report. Submitting multiple loan applications in a short period of time can drastically lower your credit score.
Instead of submitting direct personal loan applications, visit the online financial market to compare and choose the most suitable lender based on your credit score, income, and other eligibility parameters. While these markets also collect your credit report from the bureaus, such requests are considered indirect requests, which do not impact your credit score.
3. Do not compare the different potential lenders:
Since the interest rate for personal loans can vary between 10.35% and 24% per annum, it is prudent to visit online financial markets to compare and choose the right loan product and the right lender based on your credit rating, income and other eligibility criteria. Don’t limit your comparison to the interest rate alone. You should also take into account processing fees, prepayment charges, and other applicable terms and conditions before focusing on a particular lender.
4. Ignore your repayment capacity:
Lenders assess repayment capacity by calculating your Fixed Obligation-to-Income Ratio (FOIR), which is the proportion of your existing income that is spent on debt repayment. As applicants with a FOIR of between 50-60% (including the MIE of the new loan) are generally preferred by lenders, be sure to opt for a loan term where the corresponding MIE keeps your FOIR within this. fork. Borrowers with lower repayment capacity can opt for a longer repayment term to benefit from a lower EMI amount. However, a longer tenure period would also imply higher overall interest expense, and therefore, consider prepaying your personal loan whenever you have excess funds. In doing so, make sure that the overall savings in interest charges far exceed the prepayment charges levied by your lender, if any.
5. Don’t consider other loan options:
Don’t ignore alternative lending options, such as secured loan options, including supplemental home loans, title loans, property loans, and FD loans. Just like personal loans, these loans also have no end-use restrictions and usually come with lower interest rates and a longer term option than personal loans. For example, borrowers of existing home loans may opt for additional home loans available at interest rates typically as low as 8% per annum and an occupancy term of up to 30 years, depending on the length of the loan. residual mortgage loan. Likewise, those with large long-term investments may consider using securities lending to cover their financial deficits at lower interest rates without selling their securities.
This is an investor education initiative by Paisabazaar.com