Unable to get a loan? Follow these tips to enhance your loan eligibility

If traditional banks or financial institutions have denied your loan application, explore alternative lending options such as online lenders, peer-to-peer lending platforms, or credit unions. (Image: Freepik)

Struggling to secure a loan in India can be a frustrating experience, especially when you need financial assistance for essential expenses or investments. However, being denied a loan doesn’t mean you’re out of options.

By taking proactive steps to improve your financial profile and demonstrate creditworthiness, you can increase your chances of becoming eligible for a loan. Here’s a guide to help you enhance your loan eligibility and access the funds you need:

Understanding Your Credit Score

Before applying for a loan, it’s essential to understand the role of your credit score and how lenders evaluate your creditworthiness. Your credit score, typically ranging from 300 to 900, reflects your credit history and repayment behaviour. Lenders use this score to assess the risk of lending to you. Check your credit score regularly through credit bureaus and review your credit report for any errors or discrepancies.

Adhil Shetty, CEO, Bankbazaar.com, says, “A higher credit score indicates lower credit risk and increases your chances of loan approval. If your credit score is low, focus on improving it by paying bills on time, reducing credit card balances, and avoiding new credit inquiries.”

Managing Your Debt-to-Income Ratio

Lenders also consider your debt-to-income (DTI) ratio when evaluating loan applications. DTI ratio measures your monthly debt payments relative to your gross monthly income. A lower DTI ratio signals to lenders that you have sufficient income to manage additional debt responsibly. To improve your DTI ratio, focus on paying down existing debts, such as credit card balances or personal loans. Avoid taking on new debt before applying for a loan, as it can increase your DTI ratio and raise concerns for lenders. Additionally, consider increasing your income through side gigs or part-time work to lower your DTI ratio and strengthen your loan eligibility.

Building a Stable Employment History

Lenders prefer borrowers with a stable employment history, as it demonstrates a steady source of income and reduces the risk of default. If you’re self-employed or have frequent job changes, lenders may view you as a higher risk borrower. To improve your loan eligibility, aim for stable employment with a consistent income stream. Stay with your current employer for an extended period, if possible, and avoid frequent job changes unless necessary. If you’re self-employed, maintain detailed financial records and demonstrate steady business income to reassure lenders of your repayment ability.

Increasing Your Down Payment

A larger down payment can improve your loan eligibility by reducing the amount you need to borrow and lowering the lender’s risk. Save up for a substantial down payment before applying for a loan, aiming for at least 30% of the purchase price for major purchases like a home or car. A higher down payment not only increases your chances of loan approval but may also qualify you for better loan terms, such as lower interest rates or reduced fees.

Applying with A Partner

If you’re unable to qualify for a loan on your own, consider applying with a partner who has a stronger financial profile. A partner agrees to take responsibility for the loan if you default, providing assurance to the lender and increasing your chances of approval. Choose a co-partner with excellent credit and stable income to strengthen your application. Similarly, a guarantor pledges to repay the loan if you’re unable to do so, offering added security for the lender and improving your loan eligibility.

Exploring Alternative Lenders

If traditional banks or financial institutions have denied your loan application, explore alternative lending options such as online lenders, peer-to-peer lending platforms, or credit unions. These lenders may have more flexible eligibility criteria and be willing to work with borrowers with less-than-perfect credit histories. However, be cautious of high-interest rates and fees associated with alternative lending options, and thoroughly research the lender’s reputation and terms before proceeding.

Shetty explains, “Improving your loan eligibility requires proactive financial management and a strategic approach. By understanding the factors that lenders consider such as credit score or stable income, you can take steps to strengthen your financial profile and increase your chances of loan approval.”

It may sound like a difficult talk but with responsible financial behaviour, you can enhance your loan eligibility and achieve financial goals.