Personal Loans are loans that are taken for varied reasons depending on the applicant’s requirements. Unlike home or auto loans these loans are not backed by an asset and are thus known as unsecured loans. Since these loans are not backed by any asset, the lender has nothing to fall back on in case of default by the borrower. Owing to this reason personal loans are extended at higher rates; higher the risk higher will be the interest charged by the bank. Due to this reason banks will also like to be sure about who they lend to, in order to minimize their risk. Each financial institution (FI) has their own set of rules that defines their personal loan eligibility criteria.
How is Personal Loan Eligibility Determined?
Though there might be some variation in the eligibility criteria set by each financial institution, broadly personal loan eligibility is determined based on the following factors:
Monthly Income: Since monthly income will determine if a person is a position to repay his loan it is an important factor that determines the loan eligibility. Most banks fix it as a ratio to your monthly income; the personal loan that a bank will sanction will be “X” times your monthly income. This may vary for salaried and self employed. However remember all components of the salary are not included when calculating the eligibility criteria. LTA and medical allowances are not included when calculating the eligibility for a personal loan.
Employment Status: The employment status will also be instrumental in determining the loan eligibility. The bank would like to know where you are employed, how long you have worked in the company to check the stability of your job. Certain corporate houses and Government organizations may have tie-up with specific FIs which might make employees eligible for relaxed eligibility criteria and preferential rates and waiver of certain fees.
Credit Score: Credit Score sums up a person’s financial health and how he has treated debt in the past whether responsibly or irresponsibly. Most banks have a fixed credit score above which they will lend to an applicant. Generally a credit score above 750 is acceptable by FIs for sanctioning a loan application; some FIs may lend to those who have a lower score than this subject to certain conditions. In case of a low credit score an applicant has the following options: (a) he could try to improve cibil score which requires patience and time but is not too difficult generally; (b) borrow at higher rates from a FI which is willing to lend at a lower credit score; (c) look for an alternative source of funds like loan against gold, borrowing against deposits/insurance policies where no credit score is required.
Repayment Capacity: The bank looks at the monthly income of a person to determine how much to lend them. However if the entire monthly income is spent in paying existing EMIs or fixed monthly expenditures then the applicant will not have sufficient to repay his additional installments. For this the bank would like to have a look at the bank statements (for the past 3 to 6 months) to determine the outflow towards expenditures like rent, existing loan installments etc.
How to Check Personal Loan Eligibility?
Most lenders have online forms which require the user to fill in basic information like required loan amount, age, contact details, city of residence, employment details, existing EMIs etc; based on this you will be given a notification if you are eligible for the personal loan amount desired by you. This will just be an indication; actual eligibility will be determined by looking at actual documents and also the credit score. You could check eligibility at an individual FI’s website or you could use a website that allows you to compare loan tenure, interest rate offered by various banks so that you can choose a loan that suits you best.