Taking a loan can be tricky. Without proper research and awareness, applying for a loan can do you more harm than good. While evaluation your loan application, lenders look at several factors before making a decision. Hence, as a borrower it’s crucial for you to be fully aware of your eligibility on each of those aspects and apply accordingly to the right lender and for the right product. Here are some common mistakes that you should avoid while applying for a loan:
Not checking your credit report: A good credit score is your gateway to attractive loan offers. Generally, lenders consider credit scores of 750 and above as good and hence, those with such scores have higher probability of getting a good deal on a loan with attractive interest rates and other conditions.
While consistent repayment of your loan EMIs and credit card dues will gradually increase your credit score, clerical errors on the part of the bureau or a lender may undo or slow down the progress. Fraudulent credit application or transaction can also pull down your credit score. Hence, fetch your free credit report from the bureaus or online financial marketplace regularly at least 6 months prior to loan application. If you find any error in your credit report, report it to the bureau and the concerned lender for rectification immediately.
Monitoring your credit score will give sufficient time period to build your credit score. A good credit score along with other factors can also provide you with pre-approved loan offers.
Not comparing loans across various lenders: Many borrowers make the mistake of limiting their loan enquiries to their existing banker(s) while others do not consider loan options beyond pre-approved loan offers. With the adoption of MCLR for setting interest rates and increasing competing in the lending industry, interest rates and other conditions for the same set of customers can vary widely across various lenders.
As personally enquiring with all lenders is neither feasible nor advisable, compare loan options available to you online through financial marketplaces.
Not evaluating repayment capacity: Your ability to service loan repayments will depend on your daily expenses, existing EMIs, long-term investment commitments and your overall lifestyle. Without a careful assessment of your repayment capacity, you will either end up with a short-tenured loan with higher EMIs or a long-tenured one costing higher interest payout. Thus, carefully gauge how much EMI can you realistically afford each month and plan your loan accordingly.
Submitting multiple loans applications: When you apply for a loan, the lender will evaluate your creditworthiness by fetching your credit report from credit bureaus. Such enquiries are considered as hard enquiries and the bureaus deduct a few points from your credit score for each such enquiry.
Making too many loan applications within a short span will drastically reduce your credit score and your loan eligibility. Additionally, the lenders too may perceive you to be credit-hungry, thereby further hampering your loan approval prospects.
Instead of directly applying with multiple lenders, visit online lending marketplaces to compare and select from various loan options. Although lending marketplaces too will fetch your credit report, they are considered as soft enquiries and hence, do not reduce your credit score.
Not disclosing your existing debts: As lenders consider existing loan EMIs while determining loan amounts, many borrowers try to increase their loan eligibility by understating their existing debt. However, such actions prove futile as lenders will verify your existing debt by fetching your credit reports. Such deliberate misinformation can also lead to the rejection of your loan application.
—by Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.
