Personal loan is a popular credit choice, especially for those looking for quick financing options. It comes with no end use restriction, no collateral requirement, zero to minimal document requirements and quicker disbursals. These loans are highly accessible but lack of consumer awareness causes applicants to make mistakes when applying for a personal loan, which further leads to loan rejection or sub-optimal loan selection. To help you avoid personal loan rejections, here are a few mistakes that prospective borrowers should avoid when applying for a personal loan.
- Not considering your loan repayment capacity
Personal loan lenders usually assess an applicant’s repayment capacity using EMI/NMI Ratio, which tells how much of an applicant’s net monthly income (NMI) goes into paying off his debt repayments, including EMI of the proposed personal loan. Lenders usually prefer giving personal loans to applicants having EMI/NMI Ratio within 50-55%. Therefore, it is important for prospective personal loan borrowers to choose loan tenure whose corresponding EMI keeps their EMI/NMI Ratio within the aforementioned limit. Applicants exceeding this limit can choose longer tenure to lower their EMIs and thereby, lower their EMI/NMI Ratio. However, remember that longer tenure would also lead to higher interest cost.
- Approaching multiple lenders in a short time span
Every time a lender receives a loan application, it fetches the applicant’s credit report from the credit bureau as part of the loan evaluation process. Such lender-initiated credit report fetches are considered as hard enquiry by the credit bureaus. With every hard enquiry, credit bureaus lower the applicant’s credit score by a few points. Hence, having multiple hard enquiries in a short time may quickly drop your credit score, thereby, lowering your odds of availing a personal loan. Therefore, instead of directly raising requests for the loan with lenders, consumers should visit online financial marketplaces to choose the suitable personal loan offer. This is because credit report requests raised through online financial marketplaces are considered as soft enquiries and they do not affect your credit score.
- Not shopping around the loan options properly
Interest rates on personal loans are usually on the higher end, making it important for prospective personal loan applicants to explore offers from as many lenders as possible. To do that, consumers should first approach banks and NBFCs with whom they maintain an existing banking/lending relationship as many personal loan lenders offer preferential interest rates to their existing customers. Many lenders also offer pre-approved instant personal loan offers to their existing customers having good credit profiles. Such pre-approved offers require zero or minimal documentation and come with instant or same day disbursals.
To check personal loan offers from other banks and NBFCs, consumers should visit online financial marketplaces to compare personal loan offers and apply for the one that suits their requirements the best as per their credit score, income and other eligibility conditions. Besides interest rates, consumers should also look into processing fees, prepayment/foreclosure charges and other loan terms before making the lender selection.
- Ignoring Prepayment Fees and Foreclosure Charges
Personal loan prepayment/foreclosure charges can go up to 5% of the outstanding loan amount. While RBI does not allow lenders from levying charges on the prepayment of personal loans availed at floating interest rates, there is no such restriction for borrowers availing personal loans at fixed interest rates. Many lenders also restrict personal loan borrowers from making part-prepayments and/or foreclosure until the repayment of a predetermined number of EMIs. Thus, consumers who want to keep their options of prepayment/foreclosure open should also look into the charges and restrictions related to prepayments/foreclosures, if any, while comparing the loan offers.
- Changing your job frequently
Employment stability is yet another parameter that lenders look into when evaluating your loan application. Lenders may hesitate lending money to applicants who change their jobs frequently. Such behaviour shows career instability and thereby, increases the credit risk for the defaulters. Some lenders also require their salaried applicants to have worked for a minimum period, usually ranging between six months and 1 year, with their current organisations. Therefore, one must try to avoid changing their jobs, especially when they are planning to avail personal loan in the near future.
- Not considering alternative loan options
Besides personal loans, secured loan options like gold loan, top-up home loan, loan against securities, loan against property, etc. also do not have any end use restrictions and therefore, can be considered as an alternative to personal loans. Being secured in nature, these loan options usually offer much lower interest rates than personal loans. For example, existing home loan borrowers can opt for top-up home loans whose interest rates are usually the same as the underlying home loan or a notch higher, making them a much more cost-effective alternative to personal loans. The tenures of the top up home loan can go up to 15 years, depending on the residual tenure of the underlying home loan. Thus, home loan borrowers having longer residual tenure on their home loans will get longer repayment period on their top up home loans and thereby, increase their EMI affordability.
Consumers having sufficient gold jewellery can consider applying for gold loan as an alternative to personal loan. Like personal loans, gold loans are also usually disbursed within a few hours of submitting the loan application. Moreover, the interest rates offered on gold loans are usually lower than that of personal loans, especially for applicants with lower credit scores.
- Not factoring your personal loan EMI in your Emergency Fund
Your emergency fund helps you stay afloat during financial emergencies or periods of income loss caused by job loss, disability or other health issues. Ideally, your emergency fund should cover at least six months’ of your unavoidable expenses, which should also include your ongoing loan EMIs. When applying for a personal loan, consumers should also contribute towards their emergency funds so that when financial emergency hits, you can utilise your emergency fund for repaying your loan EMIs, if need be. Else, delays or default in your personal loan EMI repayment would not only attract penal interest and other charges, but also can adversely affect your credit score, which further could then hamper your eligibility to avail loans or credit card in the future.