Personal Loans are collateral-free forms of credit that financial institutions provide based on factors like an individual’s income level, occupation, credit history, repayment capability, etc. Life is uncertain, and a financial crunch can occur any time. In such conditions, Personal Loans are a great help.
Another great thing about Personal Loans is no restriction on end-use. The borrower can use the money for any purpose. However, lenders check various factors to determine an individual’s eligibility for a Personal Loan. Knowing about these factors can enhance the chances of approval and make the required funds accessible at the right time. Here are the most important factors influencing a loan seeker’s Personal Loan eligibility.
What is a Personal Loan?
Before determining the factors affecting loan eligibility, it’s crucial to understand what a Personal Loan is. Basically, these are unsecured loans that provide funds to tackle any financial emergency or overstretched expense. They are collateral-free which means borrowers do not need to provide any assets to secure the borrowed funds. The repayment terms differ considerably from 12 months to 10 years. Borrowers can use them for just about anything, including a wedding, vacation, home renovation, education, or medical emergency.
An individual looking for a Personal Loan can apply through an online loan app without visiting the lender’s office. They simply need to download the app on a smartphone, enter their personal, financial, and income info, and wait for the NBFC to conduct a verification. Once they verify the details and establish their repayment capacity, they approve the loan after ascertaining their loan amount and interest rate and disburse the amount instantly.
Factors Affecting Eligibility for a Personal Loan
There are a few factors that very much affect your application:
1. Age
Age is an important factor regarding Personal Loan application. Besides ensuring the applicant is an adult, lenders evaluate their repayment capacity. Recent graduates in their early 20s may lack monetary stability. Likewise, those retiring soon will have reduced earning power during this period.
Candidates between 21 and 58 years are usually the preferred candidates for Personal Loans from financial firms. However, the minimum and maximum age requirements vary between lending institutions.
2. Monthly Income
A borrower’s potential to repay the loan is directly proportional to their earnings. However, the minimum income requirement varies from one loan provider to another. Many lending institutions also consider the city the applicant resides in and the company they work for while assessing their earnings. Reputed institutions ask for a minimum income of 15,000 per month.
Although the finance provider considers the applicant’s main income source, extra revenue from other channels like rental income is advantageous. A supplementary revenue stream makes the loan provider feel more confident in getting the EMI payments on time.
3. Credit History
Credit score is one of the most important factors of the whole lending system. Lending institutions utilise various credit metrics to evaluate an individual’s eligibility for a Personal Loan based on their repayment capability. The credit history reveals an individual’s EMI payment regularities in the past.
Experts always advise paying current EMIs and credit card bills on time to avoid falling behind on the payments. The credit score that credit bureaus calculate based on repayment history and other credit-related behaviour has a massive influence on a person’s Personal Loan eligibility.
4. Debt-to-Income Ratio
Suppose an applicant works for a reputable employer and gets a handsome salary, but a majority of their earnings go towards other EMI payouts. Such a situation can strongly impact their Personal Loan qualification.
Loan providers calculate the applicant’s debt-to-income (DTI) ratio by splitting their total monthly income by the amount of their current monthly obligations. Those with a DTI ratio of above 30-40% may end up getting their loan rejected or paying a higher Personal Loan interest rate. Since a higher DTI ratio increases the risk of non-repayment, it is best to maintain this number below 30-40%.
5. Employment
Before approving a Personal Loan, lending institutions consider the applicant’s professional experience along with their current employment status. Those working for a well-known company with a consistent salary are worthy borrowers with stable incomes. On the other hand, those with a history of changing jobs frequently may have their loan rejected. An individual’s job stability and employment history are crucial variables influencing Personal Loan reimbursement.
6. Tenure
Most lenders have flexible repayment terms, allowing borrowers to select a loan period with EMIs adjustable into their monthly budget. Choosing a shorter tenure keeps the lender’s money at risk for a shorter period, convincing them to approve the loan with better terms and conditions.
On the other hand, a longer tenure increases the lender’s risk and also increases the borrower’s interest outgo. Use a Personal Loan EMI calculator to select an appropriate loan term with budget-friendly EMIs.
Tips to Improve Eligibility for a Personal Loan
Check out these handy tips to improve eligibility for a Personal Loan and get the necessary funds on time:
- Maintaining a high credit score as it gives a snapshot of past credit behaviour and projects the applicant as a responsible borrower
- Paying existing loan EMIs and credit card bills on time as it reduces the DTI ratio and increases the applicant’s repayment capacity
- Adding to the income sources as lending institutions use it to assess an individual’s repayment capability
- Avoiding multiple loan applications simultaneously as they project the applicant as credit hungry and make lenders suspicious of repayment
- Applying online with an NBFC having simple eligibility criteria
Consider these factors before applying for a Personal Loan through an online loan app and get assured of approval without hassle. The tips mentioned in this article will improve your eligibility for a Personal Loan and make the necessary funds available at the right time.
Also read: Can a Student Apply for A Personal Loan?
