Key product features like zero restriction on end-use of loan proceeds, quick disbursal, minimum documentation, and no collateral requirement are what make personal loans a popular borrowing option, especially for those in need of quick funds.
However, to avoid getting your loan application rejected, it’s important to know the factors that impact your eligibility and accordingly follow these smart tips to ensure you fit in the personal loan eligibility criterion of lenders:
Factors that impact personal loan eligibility
Existing debt obligations and EMI affordability
Most lenders, whether banks, NBFCs, or fintech, usually tend to prefer lending to loan applicants whose loan repayment obligations, including EMI of the new loan, are within 50% of their monthly income. Applicants whose repayment obligations are exceeding this limit may have lower chances of personal loan approval. Personal loan applicants should, therefore, aim at keeping their total EMI obligations within the said range after factoring in the EMI of the new proposed personal loan. For assistance in doing so, applicants can use online EMI calculators to identify an optimum EMI for the new personal loan. But they should ensure to take into consideration their existing EMI obligations as well as monthly contributions to various set financial goals.
Minimum income criteria
Personal loan lenders usually set minimum income criteria for the loan applicants, failure to qualify for which can lead to rejection of their application. The income eligibility criteria may also vary depending on the applicant’s location, i.e. whether it’s a metro, urban, semi-urban or rural area. As this minimum criterion tends to vary across lenders when it comes to personal loan eligibility, prospective loan applicants should compare and choose the lender whose loan offer and features like interest rate, tenure, processing fees, and minimum monthly income eligibility criteria are most suitable.
Job stability and profile
Another key parameter often factored in personal loan lenders is the loan applicants’ employment history as well as the job stability. Since doing frequent job-hopping can generally be considered a sign of career instability by personal loan lenders, they might end up hesitating in lending to such applicants. Hence, one should avoid frequent job-switching, especially if planning to take a personal loan soon.
Age bracket set by the lender
The personal loan applicant’s current as well as the age at the end of loan tenure are also taken into consideration by lenders when assessing the personal loan eligibility. Applicants who do not fall within the minimum and maximum age limit set by the lender are generally denied loans. Moreover, those nearing retirement may also face difficulty in getting the personal loan approved, primarily due to the expected dip in their post-retirement income. Also, remember that lenders tend to prefer that their borrowers can complete their personal loan repayment before retirement. So, such applicants can boost personal loan approval chances by either opting for a longer tenure to reduce EMI amount and/or loop in their family member(s) with good credit profiles and stable income as co-borrowers
A credit score is one of the most crucial factors taken into consideration when evaluating the personal loan eligibility of an applicant. Generally, applicants with a good credit score of 750 and above may have higher chances of loan approval since they are considered to be financially more disciplined in credit repayments and hence tend to carry lower credit risk for the personal loan lenders. Some lenders may even offer lower interest rates to such applicants. On the other hand, those with poor credit scores may either face rejection or would be charged higher interest rates if the application is accepted to make up for the higher credit risk involved for the lender.
Now that you know the key criterion that impacts your personal loan eligibility ensure to take these smart financial steps to boost your personal loan approval chances.
Review your credit score and report- Personal loan applicants should first ensure to build and maintain a strong credit score before applying to boost their personal loan eligibility. Follow healthy credit practices, for instance, timely repayment of EMIs & credit card bills, which restricts credit utilization ratio under 30%, monitoring guaranteed or co-signed loan accounts, avoiding multiple loans or credit card applications in a short span of time, and maintaining a healthy credit mix to build and maintain a strong credit score.
In addition to this, given that applicant’s credit score is computed based on information provided in the credit report, the presence of any clerical error or fraudulent transaction therein can unnecessarily drag down the credit score and hence, the personal loan eligibility as well. It’s, therefore, crucial to making sure to review the credit report at periodical intervals to timely identify and report such information to the credit bureaus and lenders for rectification at the earliest. Post the corrected credit score is updated in the report, one can go ahead and apply for a personal loan.
Compare amongst various loan offers- Like almost all banks, NBFCs, and fintech offer personal loans, it is important to compare the offers and product features before zeroing in on any. Firstly, check with lenders with whom you have existing consumer relationships, then follow it up by comparing with other offers from the rest of the prospective lenders. Compare the interest rates, tenure, processing fees, loan amount, prepayment charges, etc., before selecting a particular lender.
Avoid submitting multiple loan applications –Each time an individual applies for a loan, the lender fetches their credit report from the credit bureau for evaluating the creditworthiness of the applicant. Such lenders initiated hard inquiries to get included in the applicant’s credit report and pull down the credit score by a few points. Hence, one should avoid submitting multiple loan applications to various lenders, especially within a short period, to avoid damaging the credit score.
Choose tenure wisely– Prospective personal loan applicants should ensure to opt for a loan tenure that keeps the EMI affordable without straining the finances. Choosing a short tenure would imply higher EMIs, whereas a longer tenure would lead to a lower EMI amount but higher overall interest cost.
Avoid frequent job switches- Given that the practice of frequent job switches may be considered as career or job instability by lenders, it can pose a roadblock and lower the personal loan eligibility of the applicant. To avoid this, applicants can try avoiding frequent job-hopping, especially if planning to take a personal loan in the near future.