Why you should avoid multiple personal loan applications
Money is an important aspect of our lives, with it being essential to survive in today’s world. While a majority of us may have a decent source of income, there could be instances where the money we earn is insufficient to meet our requirements. Taking a loan could become our only option in such cases, with a personal loan being the most common one to meet personal contingencies.
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Given our desperation for money during such testing times, it is possible for us to apply to multiple banks, hoping that at least one of the applications will be successful. True, while multiple applications are a good norm to follow generally, they might end up doing more harm than good in the case of a loan application.
Why we think multiple loan applications are good
The main reason why we apply to multiple banks is to increase the probability of getting a loan sanctioned. Given that personal loans are unsecured, we think we have nothing to lose by approaching multiple banks. In case more than one bank approves our application, we can choose between them, selecting a bank which charges a lower interest rate for personal loan and is more favourable with respect to the terms and conditions.
One could also consider the option of multiple applications if he/she requires a large sum of money, a sum which a single bank might not offer. If multiple applications are approved, the likelihood of reaching this target might be achieved.
All in all, multiple loan applications are designed to make us feel good, hoping that we can get the money, but contrary to positive belief, multiple applications can do more harm than good in the current scenario.
Why multiple personal loan applications are bad
There are three major reasons why multiple personal loan applications can hurt you.
- Lower your credit score – A personal loan application is considered as a ‘hard enquiry’, and as such is reflected in your credit report. Multiple applications can reduce the score considerably. With banks looking at the credit score of an applicant before sanctioning a loan, the chances of getting a loan approved on the back of a reduced score become lower. Typically, loan inquiries contribute towards 10% of the score, with applications made over the last year reflected in the credit report prepared by credit information companies.
- Make you seem credit hungry – A personal loan, unlike other loans like home loans/car loans, is an unsecured loan. While an unsecured loan might seem appealing, knowing that you don’t have to offer any collateral for it, it also makes it harder to get. Banks often scrutinise the application extremely carefully before it is sanctioned. Multiple applications can make you seem like someone who is credit hungry. This often reduces your chance of getting a loan. Banks only offer loans to those individuals who do not pose a risk/pose limited risk of default, with a credit hungry person viewed as a risky proposition.
- Rejections can hamper future loan prospects – While multiple loan applications can increase the chance of loan approval, they could also result in a few of these getting rejected. One might think that a rejection is not a big deal, for there are other options still in force. This thinking, however, should change, for every rejected application is reflected in our credit report, having a direct impact on the credit score. A rejected application would not hold good for future applications, for banks are often careful about individuals whose loan has previously been rejected by other lenders.
What are the alternatives to multiple personal loan applications?
Thanks to technological advancements, we no longer have to go from bank to bank in order to get information about a loan. The internet enables us to find the relevant information online. We can compare various bank personal loan schemes, their eligibility criteria, interest rates, etc. without having to physically visit a branch. Third-party websites also enable one to apply for a personal loan online, with minimal paperwork.
Research can help one narrow down the options and find a lender who is likely to sanction the loan, subject to the eligibility requirements. This ensures that we do not spend time filling up various application forms, thereby keeping our credit score intact.
While we have all heard of the saying “Don’t keep all your eggs in one basket”, this is one instance where it might actually be beneficial to do the contrary.
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