How Lenders Decide Personal Loan Eligibility?

Lenders decide personal loan eligibility on the basis of several factors like credit score, income, repayment capacity, age, occupation, employer’s profile, etc. It is after evaluating your credit profile against these parameters, lender decide:

• if the loan should be approved;
• how much of the amount should be sanctioned, and
• at what interest rate

While personal loan eligibility criteria varies from one lender to another, following are some of the common factors that lenders consider when assessing your personal loan eligibility.

Factors that help lenders decide personal loan eligibility

Credit score

Your credit score reflects how well you managed your loans and credit card payments in the past. Generally, those practicing responsible credit behaviour like paying their credit card bills and loan repayments full and on time, avoiding excessive hard enquiries, etc. have high credit scores. Therefore, lenders prefer offering personal loans to applicants having credit scores 700 and above. There is also a high probability for such applicants to get lower personal loan interest rates, and instant personal loan and pre-approved offers from their lenders, provided other eligibility conditions are met.

Note that some lenders offer personal loans to applicants having no or lower credit scores but at higher interest rates. Also, the minimum credit score required to qualify for a personal loan may vary from one lender to another.

Employment Type and Employer Reputation

Lenders offer personal loans to both salaried and self-employed individuals. However, they prefer offering personal loans to salaried applicants at lower interest rates due to their higher income certainty. Higher income certainty reduces an applicant’s risk to default, thereby, assuring lenders of full and timely loan repayment.

Besides employment type, lenders also look into employer’s profile. In case of salaried applicants, lenders prefer offering personal loans to government employees, reputed corporates and MNCs. In case of self-employed applicants, professionals like doctors, CAs, architects, etc. have higher chances of availing personal loans at lower rate of interest.

Age of the Applicant

Generally, the minimum age required to apply for a personal loan is 18 years and the maximum age required is 65 years. Many public sector banks also offer personal loans to pensioners based on their pension income.

Minimum Income

Lenders prefer offering personal loans to applicants with higher income because higher income implies higher loan repayment capacity, which further translates to lower risk for lenders. In case of salaried professionals, the minimum salary required by most lenders is Rs. 15,000 or above. The income requirements may vary across lenders and locations. For self-employed individuals, banks and NBFCs generally require gross annual income of Rs. 2 lakh or more to be eligible for a personal loan.

Work/Business Experience

Job or business stability is yet another parameter that lenders look into before approving a personal loan. Generally, lenders require their prospective salaried borrowers to have at least 2 years of total working experience with at least 6 months in the current organisation to be eligible for a personal loan. In case of self-employed individuals, their current business should run for at least 2 years to be eligible for a personal loan.

Loan Repayment Capacity

Lenders also assess your repayment capacity while deciding the personal loan eligibility to ensure you can comfortably pay loan EMIs by their due dates. For this, lenders use metric like EMI/NMI ratio (also known as FOIR), which is the proportion of your monthly income used for paying your fixed monthly obligations. Generally, lenders require EMI/NMI ratio of less than 50% to 55%, which implies that your credit card and existing loan EMI obligations, including that of the proposed loan, should not exceed 50% of your total income. Applicants exceeding this limit will have lower chances of personal loan approval.

Therefore, applicants should use personal loan EMI calculator before applying for a personal loan. Using personal loan EMI calculator online will help you in finding optimum EMIs based on your repayment capacity while ensuring your EMI/NMI ratio remain within 50%.

Tips on Increasing Personal Loan Eligibility

Tip #1 Check your credit score/credit report regularly

You should regularly check your credit score, especially before applying for a personal loan. Checking your score beforehand will help you in taking corrective measures on time in case your credit score is low. Checking your credit report regularly is also important to identify errors and inaccuracies as they might adversely affect your credit score and thereby, reduce the chances of personal loan approval.

If your credit score is low, you should take corrective steps like paying your credit card and loan EMIs by their due date and avoiding multiple credit card and loan applications within a short span.

Prospective personal loan borrowers having no or low credit scores can steadily build/improve their credit scores by responsibly using secured credit cards. Just like unsecured credit cards, transactions made using secured credit cards are reported to credit bureaus. The credit bureaus then factor in these transactions while calculating your credit score.

Tip #2 Add a co-applicant

Adding a co-applicant like your spouse, parents, children, etc., to your personal loan application can also help in improving your personal loan eligibility as in such cases, lenders consider credit scores and repayment capacity of all applicants. Also, note that not all lenders allow co-borrowers in case of personal loans.

Tip #3 Avoid changing your job frequently

As said before, lenders also consider your employment history and stability when evaluating your personal loan eligibility. Lenders may hesitate giving out personal loans to applicants who change their jobs frequently. This is because job hopping reflects career instability, which increases credit risk for lenders. Therefore, applicants must try to avoid changing their jobs frequently, especially when they are planning to take a personal loan in the near future.