Personal loans are the best financial instruments when you are stuck in a financial crisis. The ability to use funds as desired, repayment flexibility, and simple documentation have made this loan a popular choice among buyers. But in order to get the best out of your loan, it is crucial you know the ways to obtain a cheaper personal loan rate of interest. Here is how you can get the one.
Review personal loan eligibility
Each lender has different eligibility requirements. Even if your application is rejected by one lender, another lender may be willing to sanction you a loan at a lower interest rate. Financial institutions emphasise the lender’s age, income, work experience, and occupation status when preparing a list of qualifying criteria. If you are applying for this loan for the first time, we have provided you with a list of the minimum requirements that most lenders ask for in order to provide an affordable personal loan rate of interest.
- This loan can be applied only Indian citizens.
- The lender will not accept your application if you are under the age of 21 or over the age of 58.
- You must earn a minimum monthly income of at least Rs 15,000.
- A minimum of one year of work experience is required, whether you are a salaried employee or self-employed.
Track your debt-to-income ratio
The debt-to-income ratio (DTI ratio) tells your financial institution how much of your monthly income is going toward debt repayment. Many borrowers overlook this factor and, as a result, end up with a high personal loan rate of interest. Still, don’t get this point. No worries, here is an example explaining the same.
Assume your monthly income is Rs 1.5 lakh and your loan requirement is Rs 1 lakh. Let’s say for a moment that your monthly obligation will be around Rs 7,000. The lender will now consider your existing debt EMI when approving you for a loan. If you have multiple loans, such as a home loan, a vehicle loan, and an education loan, and your total existing EMI is around Rs 95,000. Your loan request may be denied by the lender. This is due to the lender’s assumption that, in addition to debt obligations, you are also responsible for household expenses, child’s education fees, insurance premiums, and so on.
You can calculate your DTI ratio by adding all your existing debt EMIs and dividing them by your gross monthly income. If your DTI is greater than 40, you should pay off some of your debts before applying for a loan.
Choose the loan amount wisely
You must choose your loan amount wisely in order to obtain an affordable interest rate on your loan. Many people mention the maximum amount stated on the lender’s website. However, the loan amount is determined after evaluating various parameters. Based on their personal loan eligibility, some borrowers are eligible for Rs 5 lakh, while others are only eligible for Rs 2 lakh. Before submitting your application, connect with the lender to determine how much loan amount you qualify for.
Another critical step here is to calculate your EMI ahead of time. This can be accomplished by using a loan EMI calculator. The calculator will tell you how much you can afford. And if the EMI is well within your budget, the lender will have no problem approving you for an affordable personal loan rate of interest.
Avoid submitting multiple loan applications
When you are in desperate need of funds during an emergency, you may end up submitting multiple loan applications to various lenders in a panic. But did you know that this activity of yours has a negative impact on your credit score?
When you apply for a loan, regardless of the type, the financial institution will request your detailed financial history from a credit bureau. The concerned bureau will then provide information such as your current and previous debt records, loan moratorium, loan settlement, and other critical information. When they provide these details, they mark the transaction as a hard inquiry on your credit report. Hard inquiries are known to hurt your credit score, and having too many of them at the same time will cause your credit score to drop to a level where recovering to a satisfactory score will be difficult.
Improve your credit score
Credit scores typically range from 300 to 750. Anything above 750 is considered good, and you can easily secure an affordable personal loan rate of interest on such a score. But what if you have a bad credit history? Is this to say you will never be able to secure a loan or obtain funds on favourable terms? Every problem, including a low credit score, has a solution.
Here are some of the most effective ways to improve your creditworthiness.
- Reduce your credit usage. Your creditworthiness will suffer if you use more than 30% of the total limit.
- In the event of a financial crisis, always have a backup plan in place to repay your debt.
- Even if you are not using your older credit card, keep it open.
Meeting the bare minimum of personal loan eligibility requirements is insufficient for obtaining a low-interest loan. You will need a steady income and a good credit history for that. If you believe your profile is not strong enough, consider adding a co-applicant to your loan application.
A co-applicant is someone who shares equal debt repayment responsibility. They could be your spouse, kids, parents, or a friend. When introducing a co-applicant, try to review their income and credit report to ensure they have a strong profile and can help you secure a low-interest loan.
Provide additional income source
Although your primary income is important in loan approval, secondary income can help you secure a loan at a lower interest rate. Attach documents proving your additional income when submitting your application. A secondary source of income could be freelance income, rental income, part-time business income, and so on.
You will come across various suggestions on the internet that provide ways to secure a cheaper personal loan rate of interest. But the above-mentioned tips are the ones that are tried and tested.