How Lenders Evaluate Your Eligibility for Personal Loan?

If you are looking for a personal loan then make sure you fulfill the listed criteria to get approval from lenders

The unsecured nature of personal loan increases the credit risk for lenders as it gives them no underlying asset to rely on in case of defaults. This leads lenders to exercise extra caution while evaluating personal loan applications. Apart from the usual parameters like age and salary, personal loan lenders also consider various aspects of their applicants’ credit profile to evaluate their loan applications. Here are some of those key parameters used for evaluating personal loan eligibility:

Credit Score

On receiving a personal loan application, lenders usually look into the applicant’s credit score first to assess his creditworthiness. They usually prefer approving personal loan applications of those having high credit scores i.e. 750 and above, as such individuals usually exercise greater degree of credit discipline. Some banks and NBFCs also offer lower interest rates to such personal loan applicants. Personal loan applicants having lower credit scores have their loan requests either rejected or approved at higher interest rates.

As the need for a personal loan can arise anytime, consumers should keep a tab on their credit scores. They should also review their credit reports from all credit bureaus at regular intervals. Making this a regular practice will give consumers enough time to take counter steps for improving their credit scores, making them credit ready as and when the need arises.

Reviewing credit reports periodically will also help them identify clerical errors, incorrect information or fraudulent activities and report the same to the respective credit bureau(s) and lender(s) for rectification. A rectified credit report may also increase your credit scores by a few points, thereby, improving your chance of availing personal loan or any other credit in future. 

Loan Repayment Capacity

Personal loan lenders also consider applicants’ loan repayment capacity while assessing their loan applications. They usually prefer giving out loans to applicants having their monthly loan repayment obligations, including EMI of the proposed personal loan, within 50-55% of their net monthly income.

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Applicants who exceed the above-mentioned limit have lower probability of availing loan approval. Such applicants can improve their chances by choosing longer tenures on their personal loans. Extending their loan tenure will decrease their EMI obligations, which resultantly will improve the loan repayment capacity of the applicant.

Applicants planning to apply for a personal loan can use a personal loan EMI calculator for determining their optimum EMIs based on their loan repayment capacity while making sure that the total loan repayment obligations, including that of the proposed loan, does not exceed the aforementioned limit. There are several EMI calculators for personal loan available online on lender websites as well as financial marketplaces for consumers to use anytime.

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Employer & Occupation Profile

Lenders also look into their applicants’ employment profile during the loan evaluation process. Some banks and NBFCs fix personal loan interest rates on the basis of their applicants’ employment profile along with other factors. Lenders offer personal loans to both salaried and self-employed applicants. However, their preference is usually towards the salaried applicants due to their income certainty.

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Among salaried loan applicants, those working with government or public sector undertakings have higher chances of securing personal loans, followed by applicants employed with MNCs, corporates and other reputed private sector companies. Among non-salaried applicants, professionals like Chartered Accountants, doctors and architects have higher chances of availing personal loans and at lower interest rates. Applicants whose occupation does not fall within the preferred occupation profile of their lender may get their loan application rejected.

Job/Business Stability

Banks and NBFCs also look into their applicants’ work experience, job stability or business vintage to ensure timely loan repayment. In case of self-employed applicants, lenders prefer sanctioning personal loans to those having business vintage of at least 3 years. Personal loan lenders usually require their salaried applicants to have the total work experience of 1 to 3 years, with some lenders additionally requiring their loan applicants to have work experience of at least 1 year in their current organisation.

Hence, consumers planning to avail personal loans in the near future should avoid job changes. Note that applicants who change their jobs frequently usually have lower chances of getting loan approval as job instability increases the credit risk for lenders.

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