To make sure that your loan application is approved or know the reasons for why it didn't approved in the past, you need to understand the factors that a lender considers before sanctioning a loan to an applicant. It is the credit score that is more important than filling the loan application correctly. To arrive at the applicant's credit score, bankers factor in, monthly income, location, job stability, employer's profile, fixed obligations to income ratio (FOIR), among other things.
While not much can be done in terms of monthly income, location or employer's profile in a short amount of time, one's credit score may be improved.
Keep the expense-to-income ratio lower
The lender will judge you on your bank balance. A loan may be rejected for having low minimum net monthly income. In simpler words, the lender needs to know that your income is larger than your monthly spending and also to a good extent.
Ideally, your net monthly income ratio or FOIR should be 40 to 50 percent, which means that only 40 to 50 percent of the income you make each month should go towards other loan payments (EMIs) and regular expenses.
Note that the lender will include the potential EMI on the loan that you apply for, along with the existing loan obligatory payments to arrive at this ratio.
Pay your credit card dues, bills and EMIs on time
Your credit history is the report card of your financial discipline. Financial institutions check your repayment practices on your past loans and any credit borrowed in the form of overdraft or credit cards, to see how apt you have been with your payments.
Even making payments of your utility bills after due date could hurt your credit score.
Keep a check on your credit utilisation
Credit utilisation ratio is the proportion of total permissible credit limit used by a card holder. Experts say that it is ideal to keep the ratio at 30 percent.
For example, it you have a credit limit of Rs 1 lakh per month, it is wise to stay at Rs 30,000 spending limit, not too much and not too little.
While maxing out on the limit makes it look like you are credit hungry, not using the credit card at all will make you miss out on improving your credit score and gain some points to valid credit card offers.
If you make limited use of the credit card, you will be able to make the payment on the dues on time, and in turn, improve your credit score.
A good credit score does not come from not taking the risk of spending or borrowing but being disciplined towards how you use the borrowed money. It will help build a credit history that will make the banks want to offer you loans. They do not want to add defaulters to their customer list.
Do not make enquiries about the loan directly
There are two kinds of enquiries in the financing world- Soft and hard enquiries.
If you call the bank directly, it will be considered as a hard enquiry, wherein the lender will initiate the request to generate credit report to find out about your credit worthiness. The more number of lenders that pull out your credit report, the more it will hurt your credit score.
There are plenty of online loan rate comparison platforms where you can get a brief idea on the information you are looking for instead.
Do not take too many loans
On failing to get the desired amount, you might want to opt for another loan or you may be in the habit of taking loans for frequent needs.
Taking too many loans not just shows that one is bad at money management; spending more than you can handle could put you in a debt trap where you will have to take a new loan just to pay off an older loan.
Do not switch jobs very frequently
While the bank/lender will be doing a background search on your employer, it will also check on how stable you are with the job. The job stability assures that one will have income coming in to be able to repay the potential loan.
The employer's check will help the lender ascertain the possibility of the applicant losing his/her job during the loan term.
In conclusion, a good credit score will not only help in getting a loan approved, but may also fetch you one at a lower interest rate.