Your financial history can play a very crucial role in your personal loan approval. When you apply for a loan whether through an instant loan app or through a bank the lender first checks your financial history. This is because quick loans are unsecured loans, and the lender relies only on your current income and past history to determine the risk associated with your loan account.
Your financial history not only impacts your personal loan approval but also the interest rate at which the loan is extended to you. It may also affect the total loan amount as well as the loan tenure you are eligible for. Having a financial history marked with a few delayed payments might result in a slight higher interest rate. But if there is a history of loan default, then there is a higher chance of loan rejection.
Read on to know your financial history can impact all your future loan applications.
What is Financial History?
One of the most common terms you must have encountered while applying for a loan is ‘credit history’. Credit history also known as financial history is created over the years based on your borrowing habits, repayment habits and other related financial decisions. In case, you have never availed a loan before, then your financial history would be marked as N/A.
With no financial history, many financial institutions avoid offering loans because of the high risk. When you avail a credit for the first time, your lender sends this record to a credit bureau and based on the information shared by your lender the credit bureau creates your credit profile.
The credit bureau considers four important aspects while creating your credit history and credit score. This includes your repayment habits, borrowing habits, credit utilisations and fixed obligation to income ratios. These aspects contribute proportionately to the overall financial history creation. Based on this history, the credit bureau assigns you a 3 digit credit score between 300 to 900.
A higher credit score indicates that you are a responsible borrower and you have always repaid the loan on time and in full. Thus, the lenders consider you as a low-risk borrower and they are more open to offer you a loan. In contrast to this, a lower credit score indicates missed payments and the lender may consider you as a high risk borrower. If your credit score is too low, then the lender may reject your loan application.
How Does Your Financial History Affect Your Personal Loan Approval?
Your financial history is a reflection of your borrowing and repayment history. Given that quick loans are unsecured financing options, the weightage on the financial history is high. Lenders rely on your financial history to approve your loan application.
Below are some pointers that better emphasise how your financial history can lead to personal loan approval or rejection.
- If you have borrowed a loan previously and maintained a strict repayment schedule with timely and full payment of EMIs, you are likely to have a good credit history. This should contribute positively to loan approval.
- If you have missed or delayed on repayments but rearranged for a repayment plan with your lender, it would slightly impact your credit history negatively and you would owe some explanation to your new lender.
- In case you have availed a balanced mix of credit like secured and unsecured advances, your loan portfolio should be considered low-risk for future approvals and impact loan availability positively.
- If your fixed obligation to income ratio exceeds 50%, or simply put, if you have monthly liabilities measuring more than 50% of your monthly income, your credit history is negatively impacted. Vice versa, if it is under 50%, your chances of accommodating a new loan remain high.
- You must also maintain your credit card utilisation under 30% of your total available credit as it keeps your credit dependency low and gets you in the good books of your lender for a quick loan approval.
- Another aspect that lenders consider when assessing a personal loan application is the frequency of applications made in the past 6 months. If there are multiple applications made within a short duration, it impacts your credit score negatively.
Conclusion
Thus, in conclusion, your financial history has a huge impact on your personal loan approval. If you still have an unpaid loan then it will affect your loan application negatively. Any past defaults, deferments, forbearance can result in rejection of your quick loan application.
However, you can still check with an instant loan app, as these modern technology driven lenders have a more complex way of calculating your repayment capability. However, the best case is to always make your payments on time and in full.