Authored by Naveen Kukreja
Borrowing can have both short and long term implications on our overall financial health and hence, it’s crucial to opt for the right loan and lender, keeping in mind your monetary requirement and affordability.
Here are 5 smart borrowing checkpoints for you to implement -
Review your credit score
Credit score is one of the first filters factored in by lenders to assess your creditworthiness while evaluating loan application. Those with a credit score of 750+ have higher chance of loan approval, at comparatively lower interest rate. Hence, make sure you review your credit report at regular intervals. This is especially relevant for those who are planning to avail loans in the near future.
Fetching your credit report periodically can also assist in timely detection of clerical errors or wrong information, and enable you to report them to credit bureaus and lenders for rectification.
You can avail one free credit report from each of the four credit bureaus per year. Alternatively, visit an online financial marketplace to pull out credit report, along with free monthly refresh. Such marketplaces can also extend pre-approved loan offers based on your credit profile and requirement.
Do not ignore your EMI affordability
One of the major parameters factored in by lenders while evaluating creditworthiness is the borrower’s EMI repayment capacity. Lenders generally tend to prefer lending to applicants whose loan repayment obligations, including the EMI of the new loan, does not exceed 50% of their net monthly income. Applicants with higher loan proportion have higher risk of defaulting, given that a sizable section of their income is being consumed for loan repayment obligations.
Before applying for a loan, use online EMI calculator to find the optimum EMI amount that would maintain your monthly repayment obligations within 40%-50% of your monthly income. Ensure you also factor in monthly investments for crucial financial goals while checking EMI affordability. Keep in mind that choosing an aggressive repayment schedule at the cost of ignoring your investment contribution towards crucial financial goals might force you to opt for costlier loans later on to fulfil financial goals.
Include loan’s EMI in your emergency fund
Given that the primary purpose of having an adequate emergency fund is to tackle unforeseen financial exigencies and handle your monthly mandatory expenses during unforeseen financial emergencies like sudden job loss or severe illness; you must include at least 6 month’s loan EMIs in the corpus you set aside as emergency fund. Doing so can save you from defaulting on loan EMI or incurring late payment penalty during financial crisis.
Compare amongst various lenders and offers
The interest rate and fees levied on loans can vary widely depending on the lender and their credit risk assessment. This makes it crucial for you to compare loan offers from as many lenders as possible before zeroing in on one. First reach out to your existing bank partner for a loan, and then visit online financial marketplaces to compare the loan offers from other lenders based upon your credit score, monthly income, employers’ profile, job profile and other loan eligibility criterion. Opt for the loan that costs you the least and is sync with your repayment capacity.
Avoid submitting loan applications to multiple lenders
Whenever you submit a loan or credit card application, the lender evaluates your credit repayment behaviour by fetching your credit report from the bureaus. Such lender-initiated enquiries, popularly known as a hard enquiry, can reduce your credit score by a few points. Also, submitting multiple loan enquiries within shorter span of time can project you as a credit hungry borrower, leading to rejection of your loan application.
Instead of directly submitting multiple loan applications, you must visit online financial marketplaces to choose the right lender and loan offer amongst multiple options. Credit report requests generated through such platforms are termed as soft enquiries, and do not impact your credit score.
Naveen Kukreja is CEO and co-founder at Paisabazaar.com. Views are personal