Your credit readiness primarily depends on two factors — your ability to get the loan approved and your ability to regularly service repayment obligation post disbursal without jeopardising your financial health.
Here are four moves to increase your financial preparedness for availing a loan:
Review your credit score
Credit score is one of the first filters factored in by lenders to assess credit worthiness while evaluating a loan application. As lenders consider credit scores of 750 and above as ‘good’, those with such scores have higher chances of loan approval. Many lenders have also started the practice of risk-based pricing wherein they charge lower interest rates for loan applicants with higher credit scores.
Hence, consumers should make it a habit to fetch their credit report at regular intervals, especially those planning to avail loans in the near future. Fetching credit report at regular intervals will allow them to monitor their credit score and take adequate steps to maintain or improve their credit scores over 750. Practicing good financial habits like repaying the EMIs or credit card bills by the due date, ensuring credit utilisation ratio within 30%, avoiding multiple credit inquiries with a short span, etc can help in building or improving their credit score over a period of time. Fetching credit reports can also help in identifying clerical errors or wrong information in your credit report dragging your credit score down. Such misinformation, if identified, should be reported to credit bureaus and lenders for rectification. A rectified credit report will automatically report a higher credit score.
Consumers can avail one free credit report from each of the four credit bureaus once a year, or alternatively fetch free credit report along with monthly updates from online financial marketplaces. Financial marketplaces can also provide pre-approved loan offers basis your credit score and other personal details and eligibility criterion.
Check your EMI affordability
Another major factor used by lenders to evaluate your creditworthiness is your EMI repayment capacity. Lenders usually prefer to lend to those whose loan repayment obligations (including the EMI of the new loan) do not exceed 50% of their net monthly income. Those with higher proportion are considered to have higher chances of loan default.
Hence, use online EMI calculators to find your optimum EMI that keeps monthly repayment obligations within 40-50% of your monthly income. Approaching a lender with optimum EMI will help in increasing your loan approval chances. Also ensure to factor in your monthly investments for your crucial financial goals while checking your EMI affordability. Opting for an aggressive repayment schedule at the cost of ignoring your investment for crucial financial goals might force you to opt for costlier loans for those financial goals later on.
Compare amongst various lenders and offers
The lending rates and other fees levied on loans can vary widely depending on the lender and their differing credit risk assessment. Hence, it is crucial for loan applicants to compare the loan offers from as many lenders as possible. Start your loan comparison journey by enquiring with banks and NBFCs with which you have existing consumer relationship. Then, visit online financial marketplaces to compare the loan offers and features provided by other lenders on the basis of your credit score, monthly income, job profile, employers’ profile and other loan eligibility criterion. Opt for the one that cost you the least while suiting your repayment capacity.
Include the proposed loan’s EMI in your emergency fund
An adequate emergency fund assists in tackling unforeseen financial emergencies or income disruptions due to job loss, severe illness or disability. Ideally, an adequate emergency fund should be capable of meeting your monthly mandatory expenses, including your loan EMIs, for at least six months. Hence, increase the size of your emergency fund by including the six month EMIs of the new loan before applying for it. This will allow you to continue with your loan repayments during financial emergencies or income disruptions and thereby, save you from incurring late payment penalties, increased interest cost and adverse impact on your credit score.
(By Radhika Binani, Chief Product Officer, Paisabazaar.com)
