Applying for a Personal Loan?
Make Sure You Follow these Do’s and Don’ts
A personal loan is one of the easiest loans that you can avail of. It is conveniently available and can be used for a variety of reasons starting from meeting medical emergencies to paying school fees, for travel, or as a stop-gap arrangement when you face a cash crunch at the end of the month.
Documentation is generally a time-taking and an arduous process while availing of any loan. But, personal loans come with the least amount of documentation so that it becomes easier to avail of the loan. Another big positive of a personal loan is that it comes without any need for collateral.
With many fintech lenders developing in the personal loan space, it has become easier to avail a personal loan in a matter of hours. Banks have also been focusing on lending to the retail sector rather than the corporate sector.
An emergency or a need for money can come up at any time. It is necessary to make sure that each time you need a loan, you should be able to get a loan without any hassles. Wonder how you could ensure that each time you apply for a personal loan, you get a loan?
It is quite simple. Just follow these do’s and don’ts.
Must Do’s When Applying for a Personal Loan
Know the Eligibility Criteria Well
Every lender has its criteria for allowing any loan; be it a personal loan or a home loan. It is essential to read up on the eligibility criteria and make sure that you meet them all. There could be various factors that decide your eligibility criteria, it could be your age, minimum income, city/town of residence, credit score, mode of employment, etc.
It is not enough that you meet only one or two of the set criteria. To successfully apply for a personal loan, you got to see to it that you meet all of the criteria.
Be Aware of Your Credit Score
Your credit score is a 3 digit number in the range 300-900, assigned by the credit bureaus. A good credit score is one of the main determinants of your loan approval. Most of the banks and other Non-banking Financial companies look for a credit score above 750 to approve any kind of a loan. While it might be relaxed for secured loans like a home loan or an auto loan, it might not be relaxed for unsecured loans like a personal loan.
It might be good to know that fintech lenders allow you personal loans on a much lower credit score than the ones mandated by banks and financial institutions.
Whenever you are applying for a personal loan, it is a good practice to check your credit score beforehand. If you have a low credit score it is better to wait for some time till your score improves rather than applying immediately and facing rejection.
Compare Various Lenders
Each lender offers different interest rates for a personal loan. Before availing of a loan, look for the various offers and interest rates from banks, NBFCs, and fintech lenders. Also check, if you are eligible for any pre-approved offers for loans from your bank or credit card companies. These offers may come at lower interest rates as you have an existing relationship with those entities.
Check up on Other Charges
A personal loan comes with many charges other than the interest rate. It could be the processing fee, prepayment penalty, etc. It is good to get a clear understanding of the nature of these charges along with the financial burden it would add.
For Example, Some banks allow prepayment of a personal loan only after the completion of 12 months of the loan, which means that even if your financial position improves, you would not be able to close the loan. Also, there is a penalty charged on prepayment, which is a percentage on your total loan outstanding. Make sure you take these into account while applying for a personal loan.
Know the Documents Required
Every loan requires some form of documentation. A personal loan comes with the least amount of documentation in the entire loan universe. Generally, personal loans require proof of identity, proof of your residence, and your income proof. However, be sure to submit the current and relevant documents in each of the categories to get approval every time you submit a loan application.
Some Don’ts to Be Kept in Mind While Applying for a Personal Loan
As there are do’s for applying to a personal loan, there are some don’ts which are equally important to be kept in mind.
Applying to Several Lenders Simultaneously
When in an emergency, you may think that if you apply to more than one lender, at least one of them could approve your application. Sadly enough, it doesn’t work that way. No matter which lender you apply, all of them check your credit score before approving your loan. Each of your loan application creates a hard inquiry against your PAN.
When there is an increased number of loan applications against your PAN in a short period, you are considered as a Credit Hungry person, which does not bode well for your loan application, thereby increasing chances of rejection.
Availing a Bigger Amount than You Can Easily Payback
All loans have to be paid back. The EMI that you would pay is based on the amount of the loan, interest rate, and the tenure of the loan. Use one of the EMI calculators available online to calculate the EMI for the amount that you intend to borrow. Trying with various loan amounts and interest rates as well. This should help you come up with the ideal EMI that you could pay up without creating a dent in your monthly budget.
Another factor that is important here is the number of existing loans serviced by you. As a thumb rule, EMIs payable should not exceed 30-40% of your take-home income. If you have existing loan EMIs already eating up your income.
Applying with Lesser-known Lenders
Sensing the opportunity available for lending, several online lenders have mushroomed. However, not all of them follow fair and transparent lending practices. Do your due diligence before choosing an online lender. You could check reviews on Google or the play store, on social media, or get recommendations from friends and family before applying for a loan.
As you would end up allowing access to many of your phone features for installing the app of the particular lender, make sure the app has enough security features and is safe.
Once you avail of a personal loan, always take care to make repayments on time. This would help you maintain a good credit score which will, in turn, help you get loans in the future as well.