5 Ways to Improve Your Personal Loan Application

by Bea Bongat, on category "Personal Loan"

November 15, 2016


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Have you met a fellow Filipino with zero debt? It’s highly unlikely. Whether it’s a mortgage or the tiniest unpaid credit card balance, only a rare few can say they are truly debt-free, and the numbers back this up. According to the 2012 Bangko Sentral ng Pilipinas (BSP) Consumer Finance Survey, only 4.6% of those surveyed spent less than their monthly income. 51.5% spent equal to their monthly income and almost half, at 43.8%, spent more than their income. For those spending more than their income, where do they get the money? And for those who spend equal to their income, what happens when emergency expenses, such as a hospital bill or a car repair, arise? Enter personal loans.

Personal loans serve as a quick, answered prayer. You can borrow x amount of money and pay it back in monthly intervals plus interest. There’s no need to wait for the next payday or ask money from a friend who’s already giving you the evil eye. You can just apply for a personal loan; however, there are instances when others do not get approved. Banks and other financial institutions need to prove your credibility as a borrower before they approve your loan application.
Here are 5 ways to improve your personal loan application:

Improve your credit history

When applying for a loan, financial institutions look at your credit history to determine whether or not you are a trusted and disciplined lender. If you pay your credit card balances on time every month, this shows that you have the ability to make the monthly payments on your loans. If you have had your credit cards for numerous years and are able to remain in good standing, this shows that you have the discipline to pay down personal loans spanning 2 or 3 years. If you want to know how you can improve your credit history, read the tips below:

  • Pay your bills on time.
  • Pay your bills in full.
  • Spend less than your credit limit amount.
  • Keep old accounts (longevity counts).
  • Avoid external factors that impact your history negatively (e.g. foreclosure, bankruptcy, etc.)

Be a disciplined borrower

Zarah has one credit card with a Php 12,000 limit which she pays the full balance on every month. Yana has three credits cards, each with a Php 50,000 limit, which she pays the full balance as well all the time. Yana also has a car loan she pays on a monthly basis. Who is the more disciplined borrower between the two? And if you were a bank, who will you prefer to lend money to? In most cases, it’s Yana. So what makes Yana a disciplined borrower?

  • Yana maintains a good credit standing
  • She has the diligence to manage and pay down multiple lines of credit (e.g. credit card balance, monthly car and personal loan payments) in full every month.
  • She has a long and proven track record of paying down debt.

As with one’s credit history, financial institutions look for people who can handle multiple forms of credit (e.g. credit card, loans, mortgage, etc.) and have a history of paying them down regularly.

Be realistic with your numbers

Apply for a loan amount that you can realistically pay. If you earn Php 25,000 a month, your monthly loan payments (all forms of credit) should not amount to more than 40% of your monthly income, or more than Php 10,000. If they total more than 40% of your income, will you have enough to pay down your other monthly expenses? Or vice versa, if majority of your income is eaten up by your other expenses, how will you pay down the balance on your loans?

Your monthly debt divided by your gross monthly income (Php 10,000/Php 25,000) is your debt-to-income ratio (DTI). It’s best to keep your DTI ratio low because banks won’t approve you for a loan you can’t afford.

Ensure you can show proof of income

When banks approve you for a loan, they expect to get their money back. This is the importance of having a regular stream of income. Employed individuals have better chances of getting their loan approved compared to freelancers. This is because if you’re an employee, you’re sure to receive your salary every month. Your payslips and certificate of employment show banks that you have the money to make your monthly loan payments.

For self-employed individuals, financial institutions will ask you to provide additional documents during your loan application. These documents include:

  • your income tax return (ITR)
  • your audited financial statements for the past years
  • necessary licenses or permits such as a DTI business permit or a SEC registration

As with one’s credit history, the above-mentioned documents show that you have a history of earning and paying taxes.

Compare loans

As with anything, it pays to do your research first. Before you go to the first institution you come across that offers a loan, compare personal loans from different financial institutions. Try to look for the one with the lowest interest rate and the mode of payment you prefer. Some providers only allow payment via postdated checks while others include auto-debit arrangements. Picking a loan that is the most realistic in relation to your preferences and financial standing will increase your chances of getting approved. As mentioned above, banks won’t loan you an amount you can’t afford, so when you compare different loan providers, ensure that the interest rate, processing fees, and loan term are realistic in relation to your financial standing.

As the Philippines leading comparison portal for financial products, MoneyMax.ph highlights personal loans from different financial institutions. You can filter and sort the comparison platform according to interest rate, monthly cost, and loan amount. Click the button below to compare personal loans.

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Don’t be 100% dependent on loans

The 5 tips above will help improve your chances of getting your personal loan application approved. With the loan money, you’ll be able to cover for both foreseen and unforeseen expenses, whether it’s to pay for your child’s tuition fees or cover a car repair. However, you shouldn’t make applying for personal loans a habit. With the amount you pay in interest, you’re actually losing more money than you think on avoidable fees.
If you borrow Php 50,000 with an annual interest rate of 17%, you’ll be paying an additional Php 4,722.88 in interest. That Php 4,722.88 could’ve have been used for something else if you hadn’t taken out the loan. If you must take out a loan, make sure to practice the following:

  • Only use the loan amount to pay for emergency/non-monthly expenses (e.g. rent, electricity, and monthly bills are not included)
  • Pay more than the minimum payment per month (to avoid paying more on interest)
  • Use incremental income such as bonuses and raises to pay the loans faster

As long as you show you’re disciplined enough when it comes to paying down the loans and managing your money, you’ll have a better chance of getting a personal loan approval and using said loan to your advantage and pay down unforeseen expenses faster.

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