Knowing the intricacies involved in a personal loan, along with the basics of maintaining a healthy credit score can help you secure credit at the best available rate of interest
In today’s digital age, taking a loan is not that difficult. Digital apps have made the process of loan – right from application to repayment rather easy. In fact, if one delves a little deeply, one can also check from where one can get a loan at the cheapest possible rate of interest.
However, amid these multitude of easy loan options, it is essential that one doesn’t fall prey to fake lenders who often snare unsuspecting borrowers into a web of high interest rates on online lending platforms.
According to Sanchay Kumar Sinha CGM – retail banking department, South Indian Bank, one should applying for a loan through digital applications on the basis of one’s income documents in order to secure the best rate of interest.
“Maintain a robust repayment record and good bureau score. Avoid too many loans and/or enquiries in the credit bureau, which might project you as a credit hungry customer. Review your credit report once in six months,” he says.
Vivek Veda, co-founder and CFO at KreditBee, a personal loan and online credit providing platform, says that meticulous planning, enhanced borrower creditworthiness, and a consistent income history are advisable if one wishes to secure a loan on favourable terms.
Proper Application Process: It is advisable to submit comprehensive income documents and apply through the digital application for a reduced rate of interest on the loan. Applying for a loan with the right documents shows the credibility of the borrower. In addition, many banks offer discounted rates to borrowers who apply through a digital application process, as it shows that the customer is digitally literate and is in a better position to repay the loan.
For personal loans, having a salary account with the lender can streamline the process, while also allowing the borrower to leverage the existing relationship with the bank for favourable rates of interest.
Says Veda: “For self-employed individuals, the key is to present meticulous financial records, such as tax returns and bank statements. The more transparent and organised your financial documentation is, the greater the confidence lenders will have in your financial stability.”
According to Veda, one should assess and improve one’s creditworthiness by obtaining a copy of the credit report and address any inaccuracies if found.
“Responsible credit management and settling existing debts can positively impact your credit score, therefore giving you a chance of negotiating better interest rates,” says Veda.
The credit utilisation ratio, i.e., the ratio between how much credit one can avail of versus how much credit was taken should ideally be kept below 30 per cent.
As a borrower, one should avoid making several loan enquiries at a time. This will prevent the perception of the borrower being a credit-hungry customer to credit bureaus, and thus help maintain a positive credit profile.
“Another important aspect to consider is to aim for a lower debt-to-income ratio to improve the loan eligibility. Settling existing debts prior to applying for a personal loan can significantly enhance this ratio. If your credit score is a concern, consider taking secured personal loans, or, obtain a trusted co-signer, thus providing additional security for the lender and potentially resulting in a lower rate of interest,” says Veda.
One should ideally not settle for the initial loan offer. Instead, one should thoroughly research to compare the various rates of interest on offer and the fees across various lenders.
One can approach the different banks with which one has deposits or a salary account and inquire about the rate of interest on the loan amount. This rate of interest can then be used as a benchmark to compare to other offers.
As a rule of the thumb, one should not blindly choose a lender just on the basis of the rate of interest on offer, but rather on the method of calculation of the interest – i.e., flat versus reducing rate of interest. In a flat rate of interest, the interest is calculated on the entire principal amount, while in a reducing balance method, the interest is calculated on the decreasing principal, thus offering you a better rate of interest.