Applying for credit, especially a loan can be a nerve-wracking, primarily with those technical terms like Interest rates, repayment terms, pre-closure charges, tenure, amount, amortization table, etc. While these terms are important and you should know about each of them before applying for a loan, but many times, individuals concentrate more on advanced technical terms pertaining to a loan and forget the basic know-how that one should possess while availing a loan.
There is a loan for every need in the market. For instance, you might be facing a medical emergency and might require a personal loan to fund the treatment. Or perhaps, you are planning to buy your own home and are looking around for a home loan. Or maybe, you need the funds for your child’s higher education, or to fund your child’s wedding. You might be looking for a car loan to finance your dream car.
Whatever the need is, with these 7 basic tips in mind, you are sure to get a good deal for your loan.
- Evaluate Your Need for Loan: It is true that there is a loan for every need in the market. But before you approach a lender for loan, do ponder over your need for credit. Please bear in mind that once you receive the loan, you would have to immediately start with the repayment of the same. EMI may come around as an added burden on your finances if you are already in a tight situation. So, think not only about the loan but till the last EMI.
- Check Your Credit Score: The importance of credit score is well known. For those who aren't aware, credit score is a very important factor when lenders review a loan application.
A credit score is a reflection of your previous credit behavior. It is a simple 3-digit number that lies in the range of 300-900 with higher scores meaning higher degrees of creditworthiness. This score has an impact on acceptance or rejection of your loan application.
It is advisable to have a credit score of 750 or above to ensure approval of your score. Higher the score, the better your chances of approval at better interest rates. So, before you apply for a loan, check your credit score and know where you stand.
Additional Reading: Side Effects of a bad credit score
Concentrate on improving your credit score, if need be: All lenders look at lending to the most creditworthy individuals. In terms of credit score, this generally translates to a figure of 750 or above. A higher score not only increases your chances of approval but also makes you eligible for a loan on favorable terms and conditions, which could be a better rate of interest or a lower down-payment.
Improving your score can take an average of 4-12 months or even more, depending on how serious your credit situation is. So, if you have a low credit score, it is well worth the wait to improve your credit score so that you could avoid rejection when you apply.
Do not take the risk of applying with a low credit score, because you will be at a risk of increasing your number of hard inquiries.
Resolve Errors on Your Credit Report, if any: If you see that you have a low credit score but unable to find any attributable reasons, you might want to check for errors on your credit report. It is possible that errors might have crept into your credit report due to oversight or it could a graver case of an identity theft. It is important to quickly file a dispute if you detect any errors and get it rectified.
Additional Reading: What are the Common Credit Report Errors that one should be aware of?
- Do an Assessment of your Debt-to-Income Ratio: Your debt-income ratio is not only important for you to ensure a loan approval but also important for you at a personal level to ensure that you can make prompt repayments.
Debt-to-income ratio is nothing but the proportion of your income that goes towards servicing of other debts. Generally, lenders do not allow for this ratio to go beyond 40%. So, if you are already servicing many debts or a big-ticket debt like a home loan, it is good to make sure that the new loan will not eat into your income and increase chances of defaults on your EMIs.
It may be good to make larger payments towards your credit card outstanding balances if any or close existing loans in order to decrease your debt obligations before you apply for a loan.
- Read the Fine Print Carefully: Loans come with many terms and conditions, like pre-payment penalty (for personal and Fixed rate Home Loans), Charges and Fee on Balance transfer or Refinancing a loan, Processing and other fee payable on loan approvals, etc.
Make sure you understand each of them and their consequences clearly before applying for a loan. Check the fine print carefully for hidden charges and ask for an all-inclusive quote.
- Negotiate for a Good Deal: If you are armed with a good credit score, you can negotiate with your lender for a better deal. Many banks and financial institutions have already started offering a lower rate of interest on loans to individuals with better credit scores. It is good to be aware of the general trend in the market for the loan that you are applying for.
Do not settle for the first loan deal offered to you. You might want to check with a couple of lenders before settling down on a particular lender. In addition to the interest rate, it is also good to check if the other associated terms offered are favorable to you. Negotiating may lead you to better offers, like a reduced interest rate, penalty-free pre-closure, etc., which will lighten your monthly EMI outflow.
While loans or any form of credit plays an important role in helping you achieve your life goals or deal with emergency, it is good to bear in mind that being responsible with credit is as important as getting a good deal on a loan.
Additional Reading: How can I achieve a High Credit Score of 850?