Life is fast-paced. From home renovation projects to medical costs to weddings, expenses can appear out of the blue. Sometimes, funds may not be easily accessible. But before you rush into piling expenses on your high-interest yielding credit card or take out a second mortgage, you may want to consider a personal loan.
A personal loan is an unsecured loan that can help you fulfill expenses, emergency or not. It offers significant sanction as well as has easier approval, the quicker disbursal and personal loan interest rates are low. It’s easily one of the most popular means of financing available today. However, to qualify for a personal loan, you need to meet the eligibility criteria.
With these few handy tips, you can boost your chances of qualifying for a personal loan:
- Credit score
Credit scores and loans go hand-in-hand. It’s one of the first filters lenders evaluate when giving out a personal loan. Credit score displays your past experiences with loan repayments and your willingness and ability to repay a loan.
The typical range of a credit score is 300 to 900. But a score of above 700 is ideal. It demonstrates discipline in your repaying ability and shows lower credit risk, and so the chance of approval is higher. A low score attracts higher interest rates or rejection. Therefore, it’s crucial to maintain a strong credit score to boost your eligibility for a personal loan.
- Pay your existing loans and credit card bills
If you already have outstanding credit card debts and multiple loans, securing another loan can be a challenge. Hence, before you apply for a personal loan, it’s better if you reduce your existing outstanding debt. Outstanding loans or debt gives lenders the impression that you may delay or default on payments.
Paying off existing debts also increases your debt-to-income ratio, which is another factor lenders take into account. Your debt-to-income ratio shows how easily you can pay the EMIs.
Tip: The ideal debt-to-income ratio is 15%. If you have multiple loans, to be able to secure another personal loan, your combined EMIs shouldn’t exceed 50% of your income.
- Choose a longer tenure
Loans can be short-term or long-term in nature. Typically, short-term ones are one to five years, while long-term ones are five years or more. While both have their advantages, a significant benefit of long-term ones is a notable reduction in the EMI amount. You can use a personal loan EMI calculator to check. The longer duration allows the outstanding to be divided over an extended period. The extended period increases the chances of timely repayment and decreases the chances of defaulting. Therefore, a longer tenure can boost your personal loan eligibility.
- An alternative source of income
Your income is also an important eligibility criterion for lenders as it lets them assess your repaying ability. Typically, every lender has a certain benchmark for a minimum monthly take-home salary to qualify. In case you fall short, you can present an alternate source of income like a residential or commercial property on rent. This will prove to the lenders that you have the needed resources to make payments on time.
At affordable interest rates without collateral or securities, speedy disbursal, and minimal documentation, personal loans are the perfect financial cushion at a time of need. The above tips can help you work on your eligibility and ensure you can secure one when you need it.