5 things to check before applying for a personal loan

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Things to Consider Before Applying for a Personal Loan Photo credit: Thinkstock

Interest rates are at an all time low, which could encourage borrowers to take out loans to meet personal financial commitments. However, interest rates are not the same for all individuals as they depend on a multitude of factors such as income, credit rating, and other factors.

If you are considering going for a personal interview, here is a checklist to go through before doing so.

Debt-to-income ratio

Clearing your existing credit card debt is a good idea before applying for a new personal loan. This is essential for lowering your debt-to-income ratio, as many lenders are unwilling to lend to borrowers who are already heavily in debt. According to Clix Capital, this ratio should be less than 50% lest it set off red flags against your loan application. The debt ratio can be calculated by dividing the total debt by your income.

It is imperative to ensure that this value remains below 50% because a higher percentage denotes a greater risk of default. As a rule of thumb, the total IMEs you are currently paying should not exceed 30 or 40% of monthly income. If not, prepay some of your debt before applying for a personal loan.

Credit score

A healthy credit rating is crucial because personal loans are unsecured and will be used by lenders to assess your repayment capacity or creditworthiness. Typically, a credit score of 725 and above indicates that you are a responsible borrower, while a credit rating of 800 and above is excellent, indicating that a person is a safe borrower. A score below 725 would indicate that you do not have a correct repayment history. As a result, you will be classified as a high risk borrower and your loan application could be quickly rejected. While some lenders can still give you a personal loan online, note that you will have to pay a much higher interest rate to partially offset the risk of default. Most lenders rely on CIBIL scores of between 300 and 900 points. Make sure you have a good credit rating before choosing a personal loan. You can do this by making a point of periodically checking credit scores.

Include all sources of income

Lenders check your monthly income to understand repayment capacity. In view of this, it is important to mention all sources of monthly income, not just salary income. It can be part-time income, rental income or any other source. Unlike home, auto, or gold loans, which are backed or secured by certain guarantees, personal loans are unsecured. Therefore, lenders should be reassured about your ability to make timely repayments.

Avoid multiple loan applications

If you apply for multiple loans during the same period, your financial situation will be reported to lenders. Whenever you apply for a loan, including personal loans, the lender will use extensive inquiries with the credit bureaus to estimate the risk of default. Multiple loan applications will result in many inquiries from lenders on your credit report. Hence, it will lower your credit score since you will be seen as a credit hungry customer. The lenders will then reject the loan application. Regularly checking your credit score will help you avoid such pitfalls.

Choose a lender with appropriate eligibility criteria

Don’t randomly apply to multiple lenders hoping that one of them will approve your loan. Keep in mind that different personal lenders require you to meet different types of eligibility criteria. It’s best to check your personal loan eligibility criteria with each lender beforehand and identify the one that’s right for you.


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