3 Ways to Improve Your Personal Loan Application

Personal loans can help you fill temporary financial gaps with ease. With lenders offering quick disbursal and easy terms, these have become the go-to option for many looking to fund an upcoming expense. In fact, most lenders let you apply for personal loans online, and within a few clicks, the loan amount is disbursed to your bank account without you having to go to the lender physically.While they are easy to acquire, many checks happen behind the scenes to check your loan eligibility.Let's look at 3 of the most critical checks lenders make before granting you the loan amount.

As a first step, most lenders ask you to submit KYC or Know Your Customer documents along with the application form. These form the very basis of your loan application. Going wrong in this step could hurt your eligibility and approval in the later stages. Make sure your documents are in order. Some of the typical KYC documents that the lender might ask are;

Some dos and don’ts while submitting your KYC documents

• Make sure your name is the same in all the documents that you have submitted.
• If your current address is different from the permanent address, make sure you provide address proof for both addresses.
• Self-attest all the documents before giving.
• Check with the lender for the list of documents required before submitting.

Being an unsecured loan , personal loans are not supported by collateral. This makes meeting the income criterion all the more important for getting the loan approved. Lenders look at a few factors to determine if you meet the eligibility requirements. While examining your income, lenders go deeper than just looking at what you earn. They need to ascertain if you can afford the EMIs easily. To find out, they look at the two most important things

1. Stability of Your Income: This depends on the kind of company you work with. Working with a big multinational company translates into better stability of income. For self-employed, the number of years of experience in your current business helps lenders ascertain your income stability.
2. Debt to Income (DTI) Ratio: Like FOIR or Fixed Obligation to Income Ratio, it helps lenders find out what portion of your income goes into repaying existing debts every month. A DTI of 50% or less is usually considered favourable.

Meeting the income criteria can be tough, especially when you're already facing a financial crunch. Some tips to help you meet these criteria are;

• 50% for all Your Expenses: Allocate not more than 50% of what you earn to the expenses you make. This includes your monthly expenses as well as existing debt payments.
• 30% for your Desires: Allocate 30% of the income to all the non-essential expenditures. This includes spending money on travel, buying a gadget, dining out, etc.
• 20% for Your Savings: Save at least 20% of what you earn. Set it aside by putting this money into a fixed deposit or a recurring deposit. You may also choose to invest this money into mutual funds through SIPs depending on your goals and risk appetite.

• Consolidate your Existing Loans: If you think you have too many loans, it may be a good idea to consolidate them into a single loan. For instance, you can consolidate credit card debts into one single personal loan.
• Adopt the 50-30-20 Rule: It's important to take charge of your finances by following a disciplined saving and spending approach. This rule can help you not just qualify better for loans but help you build a more robust financial health. Following this rule, divide your income into three segments;

• Include Income from Other Sources: While applying for a personal loan, make sure you include all the income sources and not just your primary source. Rental incomes, income from investments; all can help you increase your eligibility.
• Make Your Spouse a Co-applicant: If you’re doubtful of meeting the eligibility criteria, consider making your spouse the co-applicant and including his/her income details as well. This can increase the overall income levels and reduce the FOIR or the DTI ratio.
• Improve Your FOIR: Sometimes, you may have to go deeper than just adding more income. This can happen by improving your FOIR ratio, especially if you have quite a few existing debts. While it may seem hard, it's relatively easy if you follow a disciplined approach. Some tips to help you improve this ratio are;

A credit score is a 3-digit number (between 300 and 900) that defines your credibility to the lender. Independent credit bureaus such as CIBIL analyse your financial and other relevant data to give a credit report to the lender with your credit score. A credit score of more than 750 is usually considered good. The lender may reject your loan if you have a low credit score. Hence, it is a good idea to check your credit score before a personal loan application .

Reasons for a Low Credit Score

• A High CUR (Credit Utilisation Ratio) : If you own a credit card, make sure you check the CUR. It refers to the portion of your credit limit that you have utilised. A CUR of 30% or less is usually considered good.
• Bad Repayment History: If you have a bad repayment history of your existing debt, it may significantly hamper your credit score.
• Applying for Multiple Loans: Applying for loans at multiple places can also reduce your credit score.
• Errors in Your Credit Report: Sometimes, your past loans' status may not have updated in the credit report or may have been updated wrongly, which could lead to a reduce credit score.

Tips to Improve Your Credit Score

• Remove Errors from Your Report : If you notice any errors in your report, make sure you get it corrected as soon as possible by raising a dispute with the credit bureau.
• Decrease your CUR: If you have a credit card with a high CUR, it may be time to reduce your credit card spends or get a higher credit limit approved.
• Apply for Loans Carefully: Don’t file your personal loan application at multiple places. Rather choose a lender carefully and only apply for the loan with the one you have chosen.
• Make Payments in Time: Make sure you don’t delay your monthly EMI payments on your existing debt.

It is essential to make sure everything is in order to ensure your personal loan application is approved, and you get the most favourable terms. Keeping in mind the above points will ensure you get it right the first time and help you negotiate for the best interest rates with the lenders. Most importantly, make sure you have a clear repayment plan before you apply for the loan.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.