Be credit ready before availing a loan

Loans act as a bridge for meeting financial shortages or achieving goals that cannot be fulfilled with one’s own financial resources. But, applying for a loan require some measures of financial planning. This can improve your chances of securing a loan.

Follow these tips to enhance your financial preparedness for availing loan:

Improve your credit score

Credit score is one of the first filters factored in by the lenders while assessing your credit worthiness. As lenders consider credit scores of 750 and above as ‘good’, those with such scores have higher chances of loan approval. Many lenders also follow the practice of risk-based pricing wherein they charge lower interest rate for loan applicants with a higher credit score.

Hence, make it a habit to fetch your credit report at regular intervals, especially those planning to avail loans in the near future. Checking your credit report at regular intervals will allow you to monitor your credit score and take adequate steps to maintain or improve it.

Practicing good financial habits like repaying the EMIs or credit card bills by the due date, ensuring credit utilization ratio within 30%, avoiding multiple credit inquiries within a short span, etc can help in building or improving credit score over a period of time. Checking credit reports at periodical intervals can help identify clerical errors or wrong information in your credit report. Such misinformation, if identified, should be reported to the bureaus and lenders for rectification. A rectified credit report will automatically report a higher credit score.

You can avail one free credit report from each of the four credit bureaus once a year. You can also pull out free credit reports along with free monthly updates from online financial marketplaces. Such marketplaces can also provide pre-approved loan offers on the basis of your credit score, income and other eligibility criteria.

Include the proposed loan’s EMI in your emergency fund

An emergency fund acts as a financial backup for tackling unforeseen financial exigencies or loss of income caused by a job loss, severe illness or disability. The size of this fund should be capable of meeting your monthly mandatory and recurring expenses, including your rent, SIPs, loan EMIs etc. for at least six months. Hence, make sure you increase the size of your emergency fund by including six months’ EMIs of the new loan.

An adequate emergency fund will allow you to continue with your EMI repayments during financial emergencies or periods of income disruptions and thereby, save you from incurring late payment penalties, increased interest cost and any adverse impact on your credit score.

Factor in EMI affordability

Another vital parameter factored in by the lenders while assessing your creditworthiness is EMI repayment capacity. Lenders usually prefer lending to those having loan repayment obligations, including the EMI of the new loan, within 50% of their net monthly income. Hence, use online EMI calculators to find your optimum EMI amount that keeps your monthly repayment obligations within 50% of your monthly income. Approaching a lender with an optimum EMI can increase the chances of your loan approval.

Also, make sure you factor in your monthly investments for crucial financial goals while checking your EMI affordability. Opting for an aggressive repayment schedule at the cost of ignoring your investment for your crucial life goals might force you to avail high cost loans to achieve those financial goals.

Compare amongst various lenders and offers

Features like lending rate, tenure, loan amount, etc. can vary widely in every loan option depending on the lenders’ cost of funds and their credit risk assessment of their lenders. Hence, you should compare loan offers from as many lenders as possible before making the loan application. Begin your journey by enquiring with banks and NBFCs with which you have existing deposit or lending relationships. Then, visit online financial marketplaces to compare various loan offers available from other lenders based on your credit score, monthly income, job profile, employers’ profile and other loan eligibility criteria. Opt for the lender that costs you the least credit cost while suiting your repayment capacity.

(The author is chief product officer at Paisabazaar.com. Views expressed are personal)