What is a personal Loan?
A Personal Loan is a type of unsecured loan, meaning you don’t have to pledge an object of value to secure a loan. The approving bank or NBFC gives you the loan amount directly and you can choose to use it for education, wedding, house repairs, vacation or any other personal emergency. A personal loan is one of the most expensive forms of loans available in the market so be sure you can repay the loan easily.
What are the factors that affect approval on personal Loan?
Annual salary: Usually, a salary of minimum is required to get a loan sanction. This indicates your capability to return the loan.
Documents for Loan: Standard documents like PAN card, Aadhar card, voter identification, last salary slips, bank statement and residential proof are required.
Employment status: A steady job and a regular source of income helps loan applications to get approved. A person who changes his job frequently is not considered an ideal person to get a loan sanctioned.
Credit score: Every time you apply for a loan, the lending institution or bank concerned runs a check on your credit score. If your credit score is not healthy, i.e. if it is less than 750, the bank will be reluctant to issue you a personal loan. A healthy credit score of more than 750 will increase chances of your loan getting approved. But if you have a history of defaulting on payments or using too much credit, then your credit score will be less.
What is Credit Score?
Credit Score or Credit Rating is a figure that measures the creditworthiness of the loan applicant, based on multiple factors like past loan repayment or credit card repayment history and social score. Your credit score considers all financial transactions wherein you have borrowed and repaid money and determines whether you should be issued a new loan. Financial lending institutions and banks keep track of a borrower’s payment history across all types of loans, no matter which bank the loan was issued from. The payment history of a borrower gives an indication of whether the borrower can repay loans on time.
Any loan payment default, any missed EMI or any old unpaid credit card dues affect your Credit Score negatively. Your Credit Score shows whether you have borrowed and returned money responsibly in the past. It gives the lender a fair idea of whether you are likely to repay the loan on time or not.
Most customers have a Credit Score that ranges between 300 to 900. A good Credit Score of 750+ is considered healthy and is more likely to get loan approval easily. A poor Credit Score of below 600 is considered risky and it is difficult to get a personal loan sanction with such a rating. Even if such a loan gets sanctioned, it is often at a higher rate of interest.
What factors affect your Credit Score?
- Payment history: Delayed repayment of your current loan affects your credit score.
- Payment default: Old unpaid written off or NPA or settled loan dues affect your Credit Score.
- Current Loan outstanding: Any outstanding on any type of loan or credit card against your name figures in your credit history.
- Multiple loan applications: Keep in mind that every application for a loan reduces your credit score. So do not apply for a personal loan to multiple lenders at the same time. Wait for one bank to approve or reject, then apply afresh to another bank.
- Credit utilisation: A low usage of available credit shows low dependency on credit and this is good for your Credit Score. Generally upto 30% usage of available credit is acceptable. Anything over that indicates that issuing a new loan to you would be risky for the bank.
How to improve your Credit Score?
- Credit repair: Old unpaid dues on your loans have a negative impact on your Credit Score. Negotiate with your loan provider or a trusted credit advisory service for a flexible payment plan that suits you.
- Timely Debt repayment: Pay your debts/ EMI/ credit card dues on time. Set payment reminders and limit credit card usage. This helps your credit score in the lon run.
- No defaulting on accounts: Negative information on your past loans or credit cards like Foreclosure, Writeoff, Settlement have a negative impact on your Credit Score.
- Limit new Credit requests: Too many loans in your history reduce credit points. The lower the debt, the easier it is to maintain a healthy Credit Score.
- End Loan disputes: If you have taken a loan and missed paying your EMIs on time, this broken period impacts your credit score. Talk to your bank for a flexible payment plan that you can manage.
- Good Credit history: Know what factors impact your Credit Score. Any kind of loan, payment default, missed payments, all these affect your Credit Score.
