Are you considering a loan? Follow these 4 key steps to improve your credit preparation
Your credit capacity depends primarily on two factors: your ability to get loan approval and your ability to regularly meet the repayment obligation after disbursement without compromising your financial health.
Here are four steps you can take to increase your financial preparation for getting a loan:
Take a look at your credit score
Credit score is one of the first filters lenders consider when assessing creditworthiness when assessing a loan application. Since lenders consider credit scores of 750 and above to be “good,” those with such scores are more likely to get loan approval. Many lenders have also started the practice of risk-based pricing, in which they charge lower interest rates for loan seekers with higher credit scores.
Therefore, consumers should make it a habit to collect their credit report at regular intervals, especially those who are planning to avail loans in the near future. Checking for a credit report at regular intervals will allow them to monitor their credit rating and take appropriate action to maintain or improve their credit scores above 750. Practice good financial habits, such as paying off IMEs or credit card bills on the due date, ensuring the credit utilization ratio within 30%, avoiding multiple credit requests in a short period, etc. can help build or improve their credit score over a period of time. Retrieving credit reports can also help identify clerical errors or misinformation on your credit report, which lowers your credit score. Such erroneous information, if identified, should be reported to credit bureaus and lenders for rectification. A corrected credit report will automatically yield a higher credit score.
Consumers can claim a free credit report from each of the four credit bureaus once a year, or get a free credit report along with monthly financial market updates online. Financial markets may also provide pre-approved loan offers based on your credit score and other personal information and eligibility criteria.
Check your EMI accessibility
Another important factor used by lenders to assess your creditworthiness is your EMI repayment capacity. Lenders generally prefer to lend to those whose loan repayment obligations (including the new loan’s EMI) do not exceed 50% of their net monthly income. Those with a higher proportion are considered to have higher chances of default.
Therefore, use online EMI calculators to find your optimal EMI that keeps monthly repayment obligations within 40-50% of your monthly income. Approaching a lender with an optimal EMI will help increase your chances of loan approval. Also, be sure to factor in your monthly investments for your crucial financial goals while checking the affordability of your EMI. Opting for an aggressive repayment schedule at the cost of ignoring your investment for crucial financial goals might force you to opt for more expensive loans for those financial goals later.
Compare different lenders and offers
Loan rates and other charges levied on loans can vary widely depending on the lender and their different credit risk ratings. Therefore, it is crucial for loan seekers to compare loan offers from as many lenders as possible. Start your loan comparison journey by checking out the banks and NBFCs you already have a consumer relationship with. Then visit online financial marketplaces to compare loan offers and features provided by other lenders on the basis of your credit score, monthly income, job profile, lender profile. employer and other loan eligibility criteria. Choose the one that costs you the least while adapting to your repayment capacity.
Include the EMI of the proposed loan in your emergency fund
An adequate emergency fund helps to deal with unforeseen financial emergencies or disruption in income due to job loss, serious illness or disability. Ideally, an adequate emergency fund should be able to cover your mandatory monthly expenses, including your loan IMEs, for at least six months. Therefore, increase the size of your emergency fund by including the six-month EMI of the new loan before you apply for it. This will allow you to continue repaying your loan in the event of a financial emergency or income disruption and thus will prevent you from incurring late payment penalties, increased interest charges and a negative impact on your score. credit.
(By Radhika Binani, Product Manager, Paisabazaar.com)