The unsecured nature of personal loans increases the credit risk for banks and non-banking financial companies (NBFCs) as they do not have any security or collateral to encash in case of loan default. Therefore, lenders exercise a high amount of caution when evaluating personal loan applications. Apart from parameters like age and monthly income, lenders also consider their applicants’ credit profiles while assessing their eligibility for availing personal loans. Here are the five main factors considered by lenders when assessing the personal loan eligibility of prospective applicants:
Credit Scores
When assessing personal loan applications, lenders fetch their applicants’ credit scores to ascertain their creditworthiness. Lenders usually prefer approving loan applicants of individuals having credit scores of 750 and above as such scores show responsible credit behaviour. Some lenders also set lower rates of interest for applicants having higher credit scores. Loan applicants having lower credit scores may face loan rejection or their loans may be approved at higher interest rates.
As the need to avail personal loans may arise anytime, especially during financial emergencies, prospective applicants should track their credit scores periodically by fetching their credit reports from credit bureaus at regular intervals. Alternatively, they can also visit online financial marketplaces to check their credit scores. Fetching your credit reports and reviewing them on a regular basis will help you identify any errors or incorrect details present in the report and fraudulent credit activities made in the loan applicants’ name. Such issues, if any, should be promptly reported to the concerned credit bureau(s) and the lender(s) for correction. A rectified credit report will improve their scores and increase their probability of availing personal loans at lower interest rates.
Repayment Capacity
Lenders usually prefer approving personal loans to applicants whose total EMIs, including the EMI of the proposed personal loan, are within 50-55% of their net monthly income. Those exceeding this limit may have their personal loan applications rejected or the lender might sanction their loans at higher interest rates. Such loan applicants can opt for longer repayment tenures and/or lower loan amounts when applying for the loan. Doing so will reduce the loan applicant’s EMI obligations, which in turn will improve his/her repayment capacity.
Prospective applicants can use personal loan EMI calculators, available on lender websites or on online financial marketplaces, to know the optimum EMIs and repayment tenures for their proposed personal loans. This will also help them ensure that their total repayment obligations are within 50-55% of their net monthly income.
Employer and Work Profile
Lenders also evaluate their loan applicants’ occupation and employer profile when assessing their eligibility for availing personal loans. Some banks/NBFCs also consider their loan applicants’ occupation profiles while deciding their personal loan interest rates. Lenders usually prefer personal loan applications made by salaried individuals because of their higher income certainty. Among salaried applicants, those employed with government or public sector undertakings are more likely to have their personal loans approved, followed by employees of MNCs and reputed private sector companies. Within self-employed loan applicants, professionals like doctors, chartered accountants and architects have a higher probability of getting approval on their personal loans. Personal loan applicants whose occupation or employer profiles are not within their lenders’ list of approved employer/occupation profiles may not get personal loan approval.
Job Stability or Business Vintage
Lenders prefer approving the personal loan applications of individuals having a stable source of income. Hence, when assessing the personal loan applications of self-employed individuals, lenders usually prefer granting loan approval to those having business vintage of 3 years and above. In the case of salaried loan applicants, lenders usually approve personal loans of individuals having minimum work experience of 1 to 3 years. Some lenders also require their applicants to have a minimum work experience of 6 months to 1 year in their current company. Hence, prospective personal loan applicants should avoid making frequent job switches. Note that lenders usually reject the personal loan applications of individuals who change their jobs frequently as job instability increases the credit risk for lenders.
Existing Banking Relationship with the Lender
Many lenders prefer approving the personal loan applications of their existing customers. Some banks/NBFCs also extend pre-approved personal loan offers to their select existing customers at preferential interest rates subject to the fulfilment of their personal loan eligibility criteria. Thus, consumers planning to avail personal loans should approach their existing banks/NBFCs with whom they already share a deposit or lending relationship to check if they are eligible for such loan offers. Those eligible for such personal loan offers can use them as a benchmark to compare with the personal loan schemes of other lenders.
