How is your Personal Loan eligibility determined by the lenders?

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Personal Loan is a loan which can be used for any purpose. There is no pre-defined purpose for which the loan is being approved and the borrower can use it for any purpose without giving details about the usage of funds.

Moreover, the lenders don’t even ask for a collateral or security. A Personal Loan is an unsecured loan wherein no asset is mortgaged with the lender but still the lender gives you the loan.

The risk of the lender is high in this case as no asset is mortgaged in this case. As the risk is higher – therefore the interest rate on personal loans are also a bit higher. However, just because the interest rates are higher does not mean that the lender will lend to everyone.

The lenders prefer only to lend to those people who have the capacity to repay the loan in future. To ensure that the person to whom the loan is being given is credit worthy and has the potential to repay the loan in future, the lender checks various things.

Points checked by lenders before approving a Personal Loan

1.Income

The 1st thing which the lender looks into is your income level. The higher the income – the higher is the loan eligibility. Different lenders have different income criteria. The new age lending start-ups let you qualify with an income of upwards of Rs. 18,000 pm whereas some banks ask for income of upwards of Rs. 25,000 pm.

The 1st thing which the lender looks into is your income level. The higher the income – the higher is the loan eligibility. Different lenders have different income criteria. The new age lending start-ups let you qualify with an income of upwards of Rs. 18,000 pm whereas some banks ask for income of upwards of Rs. 25,000 pm.

2. Type of Income – Salaried or Business

The type of income earned by a person also impacts the loan eligibility. Salaried income is considered the safest form of income whereas business is income is considered less safe. The probability of the money being repaid is therefore higher in case of salaried employment, and therefore lenders have a preference for such type of applicants.

3. Qualification

All applications for personal loan require you to mention your qualification. This is because it is easier for highly qualified people to earn and repay the money as compared to lesser qualified people. Therefore, the higher the qualification – the higher is the loan eligibility.

4. Credit Score

The credit score is one of the most important parameters in deciding the personal loan eligibility as well as the quantum.The credit score is basically a score which reflects how you have used credit in the past and what your current credit health looks like.

The credit score is determined on a score of 850 and is determined based on various factors like your current outstanding loans, credit cards, previous repayment history etc. A score of 600 is usually considered as sufficient to qualify for a personal loan.

5. Employment Experience

In case of salaried employment, your employment experience is also considered. Most lenders require a minimum of 1-2 years of experience whereas new age lenders are sometimes willing to lend even with 6 months of experience.

Being employed with a single employer for prolonged period of time improves your credit worthiness and if the employer is a reputed organisation – then it is even better.

6. Periodicity of income, Monthly savings and Recurring expenses

Lenders also check the period after which you receive income, your recurring expenses like other loan EMI etc which help them determine how much you are able to save every month and repay the personal loan EMI.

If your monthly savings are high – you would be considered as a person to whom most lenders would be willing to lend.

7. Age

Most lenders are comfortable lending to people in the age bracket of 21 to 60 whereas banks are comfortable lending to people in the age bracket of 23 to 55. If a borrower does not fall in this category – most lenders would not be comfortable in lending money to such a borrower.

You may have also seen cases where the lender is willing to give you a pre-approved loan. A pre-approved loan does not mean that the lender will not check anything. In most cases of pre-approved loans – the lender has already access to some of your financial details like bank statements, credit card history etc based on which they have determined your credit worthiness and have also approved your personal loan.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and is an expert in helping people save Taxes legally. He can be reached by booking an appointment for Tax Advisory Service.