Do you have everything you need to apply for a loan!

Arvind’s neighbour, Sameer had been planning to buy his first car ever since he started earning two years ago. Being a car enthusiast, he diligently saved up for the down payment and researched on which car to buy. He also decided to take a loan to fund his dream car. 

One evening while waiting for the elevator, Arvind struck a conversation with Sameer. Since the car was all Sameer had been thinking about lately, it wasn’t long till they reached the topic. 

Arvind: Congrats on finding the right car. Have you checked the financing options?

Sameer: Not yet. I’ve only just finalised the car model. I hope the car dealer will offer a few options.

Arvind: Well, as long as you are eligible for a loan, you won’t face a problem. 

Sameer: Eligible? The car dealer said he would take care of everything. I just have to provide my Pan card, Aadhar card, and income details.

Arvind: There’s more to taking a loan than that. Lenders check your ability and intention to repay to ensure they don’t lose money. And it’s the lender and not the dealer, who will consider multiple factors including the documents and assess your eligibility for the loan.

Sameer: I think I’m missing a lot of things. Can you please spare some time to fill me in?

Arvind: Yeah, sure. Here is what you can do to increase your chances of loan approval.

1. Ensure your credit score is impressive 

One of the most important deciding factors for loan approval is your credit score. 

It is based on your repayment behaviour on your existing debts, the number of loans that you have, how often you are applying for loans, etc.  The closer your score is to the upper limit, 900 points in the case of CIBIL TU, the higher are your chances of getting loan approval. 

As per CIBIL TU, a credit score equal to or more than 750 is generally considered good and is one of the most important considerations during loan assessment.

Ensure that all the information in your latest credit report is up to date, accurate, and belongs to you. As errors or overdue payments may negatively impact your score.

If you fear loan rejection due to bad credit score, read How to improve a damaged credit score?

2. Maintain your Debt-to-Income ratio 

Ask yourself, how many loans are you currently repaying, and if you can accommodate another loan instalment in your income? Will you be able to continue repaying your loans in an unforeseen situation? 

Typically, a Debt-to-Income ratio of less than 40% is considered positive by most lenders. Exceeding this limit shows lenders that you are overly dependent on loans and may fail to repay your dues, which can impact the approval decision itself or the loan amount, term, and interest rate that you may be charged.

3.Update all documents and keep them ready

Lenders need to verify your personal, professional, and credit details to assess your creditworthiness, prevent fraud, and to be able to contact you easily. They will follow the KYC (Know Your Customer) process laid down by the RBI and establish your identity, which requires documents such as Aadhaar card, Passport, Driving license, salary slips, etc.

Ensure that you have the original copy of these documents, and the information is correct. Keeping the required documents ready before applying for a loan reduces delays and improves the chances of loan approval.

4. Down-payment

Down payment helps you save on interest costs by reducing the amount you actually borrow. This shows that you want to keep your monthly instalments small and reduce the risk of delay or non-payment of dues. The portion of the commodity's price that you borrow is known as Loan to Value (LTV). Lower the LTV, the more comfortable are loan companies about approving loans. 

Some lenders are strict about having the processing fees and down payment amount in your bank account for at least sixty days before applying for the loan. This is known as deposit seasoning. It is done to ensure that you haven’t received the money from anyone else or loaned it.

There you go, Sameer. I hope this information helps. 

Sameer: I was taking this so lightly. Thanks for sharing all the information with me. I better pull my socks up and start preparing. I will start by discussing the loan terms with the lenders, putting my documents together, and making sure the details in my credit report and submitted documents are correct. 

Arvind: That's a good start. All the best!

Being well prepared before taking a loan doesn’t just ensure that you get the loan easily and faster; it also reduces the chances of loan rejection.

Read Questions you didn't know whom to ask about your credit report and score to know how to make the best borrowing decisions.