Need Personal Loan? Here's What You Must Keep In Mind Before Applying

By Manish Shara

Getting a personal loan just got tighter. This comes after RBI’s decision to increase risk weightage on unsecured loans and credit cards by 25%. The tightening of guidelines by RBI came after a sudden spurt in demand for personal loans in a certain segment. As a result of the new directive by the central bank, banks and NBFCs will now have to give out personal loans at a higher rate of interest.

Also Read: RBI Asks Lenders To Merge Loan Processing Fees, Documentation Charges Into Actual Interest Rates

The regulator has been concerned with high growth in certain categories of unsecured loans and credit cards. So far it was on an advisory note. However, with the announcement of the new regulatory measures, the RBI has moved it from an advisory to part of a regulatory framework to check this growth. This will result in higher costs for a range of unsecured loans like BNPL, no-cost EMI, small-ticket loans, etc.

In such a situation, borrowers must keep certain points in mind while availing a personal loan:

• Pay our outstanding debts on time: Borrowers now must maintain a high credit score to get access to loans. A good credit score is the key to loan approval. A score above 700 is considered a good score, and for that, customers should pay credit card bills and outstanding debts on time. If your score is low, you need to improve the score by paying bills on time, lowering your outstanding debts, and correcting any errors in your credit report.
• Avoid ‘job hopping’: Apart from the credit score, lenders also consider the monthly income, occupation profile, employer’s profile, etc, of personal loan applicants while evaluating their personal loan applications. Lenders prefer borrowers with a steady income. A consistent employment history indicates financial stability and affirms credibility as a borrower.
• Keep your debt-to-income ratio in check: Keep your debt-to-income ratio in check. Lenders assess your ability to manage additional debt by evaluating how much of your income goes toward paying existing debts. If your debt load is higher than what the lenders expect, it would be advisable to try and lower it to some extent. One of the most obvious ways of lowering your DTIs would be to reduce your total debt by lowering your expenditures or increasing your monthly income.
• Compare rates before settling for one: Borrowers should compare and check rates with as many lenders as possible and with their financial agents. Credit risk assessment procedures vary across lenders, and the chances of loan approval and loan pricing may vary across lenders. Borrowers should start the loan selection process by first contacting banks/NBFCs with whom they already maintain deposits and/or have availed loans or credit cards. Many banks and NBFCs offer personal loans at preferential interest rates to their existing customers.
• Don’t appear credit hungry: Prospective personal loan applicants should note that making direct loan applications with multiple lenders in a short span would adversely impact their credit score. This would negatively impact the terms of your loan. Direct loan applications with lenders are considered as a hard inquiry and credit bureaus reduce the credit scores of loan applicants by a few points for each hard inquiry. So, making direct loan applications with multiple lenders within a short span would lead to a reduction in their credit scores.

While making a loan request always try to present a compelling case for why you need the loan and how you tend to repay it. Make a well-structured application with clear objectives and repayment plans. This will positively increase the chances of approval.

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

-The author is co-founder and CEO, ZET. Views expressed are personal.