5 Smart Ways to Increase Your Chances of Loan Approval During Covid-19

Loans act as an invaluable bridge to bring us closer to achieving our financial goals, such as owning a house, a car, or supporting a child’s college education. It can also get us out of unforeseen financial emergencies, like the ongoing COVID-19-induced lockdown, which can lead to liquidity mismatches, cash flow disruptions and revenue uncertainty in the near future. Hence, it becomes imperative for us to know how we can improve our loan eligibility prospects and avoid loan application rejection.

While the ongoing lockdown is likely to impact your loan processing and disbursement due to limited staff and working hours, keep these five tips in mind will definitely increase your chances of loan approval , whether you take advantage of it sooner or later:

1. Add a co-applicant or guarantor

Insufficient income, low credit score, higher FOIR, or failure to meet other eligibility criteria set by the lender may result in a loan application being rejected. To avoid this, you can opt for a joint loan with a co-applicant/guarantor, who would also be responsible for repaying the EMI loan, thereby reducing credit risk. When adding a co-applicant and/or guarantor, ensure they have a good credit profile, including stable income, good credit rating, and satisfactory repayment capacity. This would improve the overall loan eligibility and, therefore, increase the chances of loan approval.

Adding a co-applicant can help qualify for a higher loan amount, if needed. However, keep in mind that any delay or failure to repay the loan will have a negative impact on the credit scores of the principal applicants and that of the co-applicants/guarantors.

2. Choose a longer term

Those who face loan approval hurdles may choose a longer term, as it involves lower EMI expenses. Use the online EMI calculator to choose the ideal term whose corresponding EMI and applicable interest rate match your repayment capacity. However, since a longer loan term translates into a higher interest payment, you should either try to make a partial prepayment or foreclose the loan whenever you have excess funds. Ensure that the overall interest savings from prepayment far exceeds the prepayment charge, if any.

3. Build or improve a strong credit score

Credit score is one of the first filters taken into account by lenders to assess your creditworthiness. Many lenders have also started taking your credit score into account when setting your loan rates. Additionally, under the external benchmark regime, banks have the discretion to review the credit risk premium components of your loan, in the event that your credit profile undergoes a material change. It is therefore imperative for you to build or improve your credit score before applying for a loan.

Those new to credit can build their credit history by taking a disciplined approach to credit cards and eliminating unpaid dues on time and in full. Those with a low credit score should try to keep their credit utilization rate below 30%, maintain a balanced credit mix, monitor co-signed/secured loans, periodically review their credit report, and repay loan EMIs and credit card bills in a timely manner.

4. Reduce your FOIR to 40%-50%

FOIR (Fixed Obligation to Income Ratio) is the proportion of your income currently used to pay off mandatory debts such as EMI loans, insurance premiums, SIP contribution, etc. Lenders generally prefer to lend to those whose FOIR is between 40% and 50% (including the EMI of the new loan). Applicants with higher FOIR are more likely to default, since much of their income is already consumed in mandated debt repayment. Therefore, keeping the FOIR within range is vital. If your FOIR is above 40%-50%. consider prepaying, partially or fully, some of your existing debts, preferably the most expensive ones like a personal loan or unpaid credit card bills, or opt for loan consolidation, to bring your FOIR within the stipulated range . In the latter case, opting for a new loan at a lower interest rate can not only help avoid repaying multiple EMIs, but also reduce the overall interest cost, as the new loan would be granted at a rate of lower interest.

Existing borrowers can opt for an add-on home loan, as its interest rate can be as low as 7.5% per annum, usually lower than other loan options such as personal loan, credit card loan, credit, gold lending, etc. This way, you would only be left with paying off the current home loan and top-up loan, rather than multiple high-cost loans and unpaid credit card dues, thus reducing your FOIR. You can also opt for a personal loan to meet your short or medium term needs. Its duration can be between 1 and 5 years, with an interest rate ranging from 8.75% to 26% per year.

Those looking for debt consolidation with long term repayment can opt for secured loans such as loan against property. It comes with a term of 15 to 20 years, with interest rates starting at 7.18% per annum.

5. Opt for a lower LTV ratio in case of a secured loan

The loan to value (LTV) ratio refers to the proportion of the value of the property sanctioned by the lender in the form of the loan amount. This ratio is set by lenders based on their assessment of the loan applicant’s credit risk. In addition, regulators have imposed mandatory caps on the LTV ratio that can be offered by the lender, such as in the case of a home loan, a gold loan and a loan against securities. Those who need or are considering a secured loan can increase their loan eligibility by opting for a lower LTV ratio, as this would imply a lower loan requirement, thus increasing your chances of loan approval.

(By Gaurav Aggarwal, Director and Head of Unsecured Lending, Paisabazaar.com)