The unsecured nature of personal loan increases the credit risk for lenders as it leaves them with nothing to fall back on in case the borrower defaults on the loan. Because of this, personal loan lenders exercise extreme caution when assessing personal loan applications. Here are some of the aspects of an applicant’s credit profile that lenders consider when assessing their personal loan eligibility:
Credit Score
When assessing a personal loan application, lenders fetch credit scores to ascertain their creditworthiness. They usually prefer loan applicants to have credit scores of 750 and above because such scores indicate responsible credit behavior.
Some lenders also fix lower interest rates for such applicants. On the other hand, those having lower credit scores have lower chances of loan approval or having their personal loans approved at higher interest rates. Due to financial emergencies, individuals might be forced to avail of personal loans any time. Hence, everyone should check their credit scores regularly as doing so would give him/her sufficient time to improve their scores and be credit-ready when required.
Consumers can avail their credit reports directly from the credit bureaus. Alternatively, they can visit online financial marketplaces, where they can check their credit scores from multiple credit bureaus along with monthly updates and credit advisory services. Such marketplaces also allow consumers to compare and apply for personal loans online without affecting their credit scores.
Consumers should also review their credit reports regularly as it will help them timely identify errors, incorrect details, and fraudulent credit activities. On finding any such issue, they should directly report the same to the concerned credit bureau(s) as well as the lender(s) for correction. A rectified credit report will improve their scores and increase their probability of availing of personal loans at lower interest rates.
Loan Repayment Capacity
Lenders usually prefer sanctioning personal loans to applicants whose EMIs, including the EMI of the proposed loan, are less than 60% of their net monthly income. Those exceeding this limit might have their loan application rejected or might get the loans at higher interest rates. To avoid this, such applicants can select longer repayment tenures and/or lower loan amounts when making the loan application.
Doing this will reduce their EMIs, thereby, improving the applicant’s loan repayment capacity. Therefore, consumers planning to avail personal loans should use a personal loan EMI calculator before making the loan application. A personal loan EMI calculator will help them ascertain their optimum EMI and tenure for their new loan while helping them ensure their EMI obligations remain within 60% of their net monthly income.
Employer and Work Profile
Lenders also evaluate their loan applicant’s occupation profile and employer profile when assessing their loan application. Some banks and NBFCs also consider them when fixing the interest rates of their personal loans. Lenders usually approve personal loans of salaried applicants because of their higher income certainty. Among salaried applicants, individuals employed with government or public sector undertakings have higher probability of availing personal loans, followed by applicants who are working for MNCs and other reputed private sector companies.
Among non-salaried applicants, professionals like chartered accountants, architects and doctors have higher probability of getting personal loan approval. Applicants whose occupation or employer profile is not included in the lenders’ list of approved employers/occupation profiles might have their loan applications rejected.
Job stability/business vintage
Lenders prefer approving personal loan applications of those having a stable source of income. Hence, when assessing personal loan applications of self-employed applicants, lenders usually prefer approving loan applications of those having business vintage of at least 3 years. In case of salaried applicants, the required minimum work experience usually ranges from 1 to 3 years. In case of some lenders, the applicants should have work experience of at least 6 months to 1 year in their current company. Hence, consumers planning to avail personal loans in future should avoid changing their jobs.
Existing banking relationship with the lender
Many banks and NBFCs prefer approving personal loan applications of those having deposit, loan or credit card account(s) with them. Some personal loan lenders also extend pre-approved offers at preferential interest rates to their select existing customers subject to the fulfilment of their eligibility criteria. Thus, consumers planning to apply for personal loans should approach those lenders first with whom they already have a banking relationship and check if they are eligible for any such loan offer. Once you receive the offer, use it as a benchmark to compare personal loans offered by other banks and NBFCs.
