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Personal loan is one of the most preferred loan options for those in need of quick funds. However, its unsecured nature leads lenders to adopt a cautious approach while evaluating loan applications. This can lead to the rejection of personal loan applications.
Here are some of the crucial factors that lenders consider while evaluating the personal loan eligibility:
Credit profile: Credit score is one of the first filters factored in by the lenders while evaluating a personal loan application. Generally, applicants with a credit score of 750 and above tend to have a higher chance of loan approval as they are considered to be more disciplined and hence, carry lower credit risk for the lenders. Some lenders also offer preferential interest rates to personal loan applicants having a higher credit score. Those with a poor credit score either face rejection or are levied higher interest rates to make up for higher credit risk for the lender.
Make sure you build and maintain a strong credit score to boost the personal loan eligibility. Follow healthy credit practices like timely repayment of EMIs and credit card bills, restricting credit utilization ratio within 30%, monitoring guaranteed or co-signed loan accounts, avoiding multiple loan or credit card applications within a short span and maintaining a healthy credit mix to build and maintain a strong credit score.
Develop the habit of reviewing your credit report at regular intervals, ideally at least once in every three months. This will allow you sufficient time to make corrective efforts, if required, to improve your credit score. This will also allow you to spot incorrect information or clerical errors pulling down your credit score and report them to the concerned bureau or lender for rectification. A rectified credit report will automatically increase your credit score. You can fetch one free credit report every year from each of the credit bureaus. Alternatively, you can also fetch free credit reports along with their free monthly updates from online financial marketplaces.
Existing customer relationship with banks and NBFCs: Scores of banks and NBFCs offer personal loans, with interest rates ranging around 10%-24% p.a. Many lenders also offer pre-approved personal loans at preferential interest rates to the existing customers. Existing relationships can be in varying forms, including current, savings, salary or fixed/recurring deposit accounts, existing loans or credit cards.
Those looking to avail a personal loan should first contact bank and/or NBFCs with whom they share an existing banking and/or lending relationship. Interest rate and other loan features offered by them can be used as a benchmark to compare interest rates offered by other lenders. Also, visit online financial marketplaces to compare personal loans offered by other lenders based on your credit score, income, employer’s profile, job profile, etc.
EMI affordability: Similar to all loan types, lenders factor in the repayment capacity of a personal loan applicant while evaluating loan applications. Lenders usually require the monthly loan repayment obligations (including the EMI for the new loan) to be within 50% of net monthly income. Those with higher repayment obligations usually have lower chances of personal loan approval. Such applicants should opt for a longer tenure as doing so would reduce the EMI outgo and thereby, increase EMI affordability and loan eligibility.
Employment profile: Another eligibility criterion factored in by lenders before approving personal loan applications is the employment profile of the applicant. Some lenders also consider employment profile while setting the interest rates.
Generally, lenders tend to prefer lending to salaried employees over non-salaried ones due to higher income certainty of the former. Amongst the salaried personal loan applicants, those working with the public sector or reputed corporates are preferred over others. In case of non-salaried applicants, professionals such as chartered accountants and doctors tend to have higher chances of obtaining approval on their personal loan applications.
(By Gaurav Aggarwal, Director & Head of Unsecured Loans, Paisabazaar.com)