Unsecured loans make lenders exercise caution while evaluating personal loan applications
A personal loan is one of the most preferred loan options for those having instant fund requirements. It requires minimal paperwork, have quick disbursal, require no collateral, and have no restrictions on end usage of funds. However, the unsecured nature of personal loans makes lenders exercise caution while evaluating personal loan applications.
I will list some factors that lenders consider while evaluating your personal loan eligibility:
Credit Score
Those with a credit score of 750 and above are considered creditworthy and hence, have a higher chance of getting personal loan applications approved. Some lenders also offer personal loans at preferential interest rates to those with a higher credit score. As those with credit scores below 750 are usually considered to be lacking in credit discipline, lenders may either reject their personal loan application or charge higher interest rates to make up for their higher risk of credit default.
As a requirement for a personal loan can arise anytime, checking your credit score right before submission of the loan application may not be useful. Instead, develop the habit of reviewing credit reports at regular intervals, so that you have enough time to take corrective actions to improve your credit score. Following healthy credit practices like repaying EMIs and credit card dues by the due date, containing credit utilisation ratio within 30%, monitoring loans guaranteed or co-signed by you, avoiding multiple loans or credit card applications within a short span, etc can help in maintaining or improving credit score.
The periodical review will also help identify incorrect information or clerical errors, if any, in your credit reports and report them to lenders and credit bureaus for correction. A rectified credit report will automatically enhance your credit score and improve personal loan eligibility prospects.
EMI repayment capacity
As with all other loan types, lenders consider the repayment capacity of the personal loan applicants while evaluating their loan applications. Lenders usually require the personal loan applicants’ monthly loan repayment obligations (including the EMI for the new loan and existing EMIs of other loans) to be within 50% of their net monthly income. Those exceeding this limit usually have lower chances of getting their personal loan application approved. As longer tenures lead to lower EMIs, those exceeding the 50% limit should opt for longer tenures to enhance their repayment capacity by reducing their monthly EMIs.
Employment profile
Lenders consider the employment profile of personal loan applicants while approving loan applications. Some lenders also consider it while setting the interest rates. Moreover, lenders usually prefer salaried employees over non-salaried ones due to higher income certainty. Among the salaried applicants, those working with the public sector or with reputed corporates are preferred over others. Similarly, among the non-salaried class, professionals like doctors and chartered accountants have higher chances of securing personal loan approvals.
Existing consumer relationship with the banks and NBFC
Many lenders offer pre-approved personal loan offers at preferential interest rates to existing customers. Such relationships can be in the form of current, savings, salary, or fixed/recurring deposit accounts or due to their existing credit card or other loans. Thus, those considering to avail personal loans should begin their search by contacting the bank or NBFCs with whom they share existing banking and/or lending relationship. The interest rates offered by such lenders can be used as a benchmark for comparing personal loan interest rates offered by other lenders.
Bottom line
As the risk appetite of lenders and their credit evaluation processes can vary widely, your personal eligibility and interest rates charged can vary widely across lenders. Hence, make sure to enquire with as many lenders as possible regarding your personal loan eligibility. The best way to do so is to visit online financial marketplaces to fetch various personal loan options available on your credit score, income, employer’s profile, etc. This would also eliminate adverse impacts on your credit score.
The author is Director & Head, Unsecured Loans, Paisabazaar.com
DISCLAIMER: Views expressed are the authors' own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.