Most of us need to borrow money for various reasons at some point in our lives. This borrowed money acts as a source of funds for fulfilling our needs, such as purchasing a car or buying a house. However, most of us borrowers remain under-prepared while applying for loans or borrowing money from other sources, leading to failure in the procurement of required funds. A key aspect that is part of this under preparation is the failure to check our online credit score.
Besides credit score, there are numerous things to prepare yourself financially before taking a loan. Let’s explain them by deep diving into each step.
Assess your repayment capacity- Before taking a loan, individuals must check their online credit score and assess their repayment capacity to avoid rejection at later stages of their credit application. Borrowers’ repayment capacity refers to their ability to repay the loan, considering their current level of income and FOIR (fixed obligations to income ratio). Lenders generally consider FOIR up to 40-50% as preferable and such borrowers are likely to get their loans approved. FOIR is the proportion of the borrower’s net income used for paying compulsory expenses such as existing EMIS, house rent and insurance premiums. Therefore, make sure your repayment capacity doesn’t exceed 50% while borrowing money from lenders; otherwise, you may face loan rejection later on.
Review your credit score and report- Your credit report usually includes your credit score as well and shows your credit repayment history and details such as your active accounts and loans, personal details etc. Customers can visit online financial marketplaces for online credit score by fetching their credit score as well as a credit report for free, along with monthly updates. Those who do not have any credit history yet can build one by opting for credit cards. Regular & disciplined usage of credit cards can assist in building a good credit history and also results in the creation of a high credit score over time.
Check your eligibility- Every lender has its own set of eligibility criteria for granting a different kinds of loans to various borrowers. These eligibility conditions generally include criteria such as minimum age and net monthly income, current residence etc. Before borrowing money, individuals should carefully check whether they are able to meet the eligibility criteria of the lender from whom they intend to borrow money. In case you do not check this and fail to even assess your online credit score, the chances are very high that your loan application would outrightly be rejected in earlier stages itself, due to failure to meet the eligibility conditions, like a low credit score can be amongst the rejection reasons. Hence, making sure that you meet the eligibility conditions set by lenders improves your chances of getting the loan approved.
Explore and compare the borrowing options- Whether you want to borrow money for your dream house, family vacation, purchase of a car or any other personal reason, make sure you explore and research extensively about the various lenders and borrowing options available. This helps in taking the right loan from the right lender. For instance, many borrowers do not look for other lending options once they are rejected by lenders such as banks. However, other lenders such as HFCs and NBFCs do often offer loans to such borrowers. Additionally, new age borrowing options such as online loan aggregators and P2P lending platforms have given borrowers more options to borrow money. Moreover, checking various lending options through online financial marketplaces enables customers to explore better interest rates, which leads them to the most suitable source of funds along with the right lender.
While taking your borrowing decision after checking your online credit score, make sure you also keep these tips in mind, which would prevent you from any financial complication later on that can occur at worse harm your credit score as well.
Take insurance for big-ticket loans- Whenever you are planning to opt for a equity title loan such as a cart or home loan, make sure you get insurance cover for this loan. Borrowers can opt for a term insurance equivalent to the loan amount, which ensures that the family doesn’t get burdened with the loan repayment in case of your untimely demise. Term plans provide an assured sum to the family and involve very low premiums, as compared to the high insurance cover that they provide. Opt for a regular term plan over a reducing cover term plan as the regular one would continue even post the repayment of the loan’s outstanding amount.
Repay current loans, if any – Generally, it’s advisable to pay off your current loan before opting for another new one. Until it’s completely unavoidable, don’t consider taking a new loan in case your current loan is still active. Taking another loan while one or more loans are still active increases your FOIR (fixed income to obligation ratio) and decreases your net disposable income. This sometimes results in many loan applications facing rejection. Hence, prefer closing your current loan first before opting for a new loan to prevent your FOIR from exceeding 50% of your monthly income.
Borrow only what you can repay- Many borrowers often try to borrow more money than what they actually need and can repay. This often results in debt traps and situations where the borrower isn’t able to repay the borrowed money. Since anything you borrow comes with its own interest cost along with the principal amount to be repaid, therefore, make sure you only borrow what you can actually repay to avoid falling into such traps and financially draining situations.
Additionally, another mistake to avoid is borrowing money for investment. Taking loans for the purpose of investment doesn’t seem to be the most suitable option. Whenever you borrow, you ought to pay back the principal plus interest component; that’s why loans and credit cards are termed as forms of credit by bureaus when computing your credit score. In case you want to invest and don’t have much money, instead of borrowing money, one can start investing with just small amounts and later on, as these investments start generating good returns, they can gradually increase their investments.