Need a personal loan?Here’s what you must remember before applying

Manish Sara

Getting a personal loan has become more stressful. Earlier, the Reserve Bank of India decided to increase the risk weight of unsecured loans and credit cards by 25%. The Reserve Bank of India’s tightening of guidelines comes after a sudden surge in demand for personal loans in certain segments. Due to the central bank’s new directive, banks and non-banking financial companies will now have to grant personal loans at higher interest rates.

Also read: RBI asks lenders to incorporate loan processing charges, documentation fees into effective interest rate

Regulators have been concerned about the rapid growth of certain categories of unsecured loans and credit cards. So far it is just an advisory note. However, with the announcement of new regulatory measures, the RBI has shifted it from advisory to part of the regulatory framework to curb this growth. This will result in rising costs for a range of unsecured loans such as BNPL, no-cost EMIs, micro loans, etc.

In this case, borrowers must keep the following points in mind while availing a personal loan:

• Pay outstanding debts on time: Borrowers must now maintain a high credit score to get a loan. A good credit score is key to loan approval. A score above 700 is considered a good score, and for this, customers should pay their credit card bills and outstanding debts on time. If your score is low, you’ll want to improve it by paying your bills on time, lowering your outstanding debt, and correcting any errors on your credit report.
• Avoid “job hopping”: In addition to credit scores, lenders also consider a personal loan applicant’s monthly income, career status, employer status, etc. when evaluating a personal loan application. Lenders prefer borrowers with stable income. A consistent employment history demonstrates financial stability and confirms creditworthiness as a borrower.
• Control your debt-to-income ratio: Take control of your debt-to-income ratio. Lenders evaluate your ability to manage additional debt by assessing how much of your income goes toward paying off existing debt. If your debt load is higher than your lender expects, it may be advisable to try to reduce your debt load to some extent. One of the most obvious ways to lower your DTI is to reduce your total debt by lowering your expenses or increasing your monthly income.
• Compare prices before deciding to buy: Borrowers should compare and check rates with as many lenders and their financial agents as possible. The credit risk assessment process varies from lender to lender, as do the chances of loan approval and loan pricing. Borrowers should first start the loan selection process by contacting the bank/non-bank financial institution with which they have a deposit and/or a loan or credit card. Many banks and non-bank financial institutions offer personal loans at favorable rates to their existing customers.
• Don’t appear credit hungry: Potential personal loan applicants should be aware that making direct loan applications to multiple lenders within a short period of time may adversely affect their credit score. This can negatively impact the terms of your loan. Direct loan applications to lenders are considered hard inquiries, and each hard inquiry by the credit bureaus will lower a loan applicant’s credit score by a few points. Therefore, making direct loan applications to multiple lenders within a short period of time will cause their credit scores to decrease.

When making your loan request, always try to make a compelling case for why you need the loan and how you prefer to repay it. Create a well-structured application with clear goals and a repayment plan. This will positively increase your chances of getting approved.

Always remember the fact that even with the best preparation, your chances of loan approval depend on the lender. However, if you follow these steps, you can significantly improve your chances of getting this product.

——The author is the co-founder and CEO of ZET. The views expressed are personal only.

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