If you are planning to apply for a new personal loan, it’s crucial to realise that your current debt obligations can have a considerable effect on whether you are eligible. When you apply for a personal loan, lenders will evaluate your creditworthiness by taking into account several factors. One of the essential factors is your current debt and your ability to manage it effectively.
Existing debt refers to any outstanding loans or credit card balances that you currently have. This could include home loans, car loans, education loans, credit card debts, or any other debt you are repaying. Lenders evaluate your existing debt to assess your financial capability to take on additional debt obligations, such as a personal loan.
Here’s how your existing debt obligations can affect your new personal loan eligibility:
Debt-to-Income ratio: Lenders typically evaluate your debt-to-income ratio (DTI) to determine your ability to manage additional debt. DTI is calculated by dividing the monthly debt payments by your monthly income. Suppose your existing debt obligations consume a significant portion of your income. In that case, you may struggle to repay a new personal loan timely. Lenders prefer borrowers with a lower DTI, as it demonstrates a better ability to manage debt.
Credit score: Credit score plays an important role in determining your personal loan eligibility. It reflects your creditworthiness and is influenced by various factors, including your repayment history, credit utilization, and the presence of any outstanding debt. If you have a high amount of existing debt or have missed payments on your current loans, it can negatively impact your credit score. A low score reduces the chances of getting approved for a new personal loan or may result in higher interest rates.
Debt servicing capacity: Lenders evaluate your debt servicing capacity to ensure you can comfortably manage your loan repayments. This involves assessing your income, debt obligations, and other monthly expenses. Lenders prefer borrowers with a higher disposable income after accounting for existing debt, as it assures them that you can meet your financial commitments. If your existing debt payments are already substantial, it may affect your ability to service a new personal loan.
Interest rates: The interest rates offered on personal loans are influenced by various factors, including your creditworthiness. If your existing debt obligations have negatively impacted your credit score, you may be offered a higher interest rate on your new personal loan. This can result in higher monthly EMIs and increased overall interest costs.
To wrap up
Using a personal loan EMI calculator to evaluate your debt responsibilities before deciding to apply for a personal loan is a good idea. This tool helps you determine the monthly EMIs you are already paying and how much additional EMI burden you can afford.
Making an informed decision is important in avoiding excessive debt that can negatively impact your finances. To increase the chances of being approved for a new personal loan, managing your current debt responsibly is crucial.