How Do Banks Decide Your Personal Loan Eligibility?

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If you are looking for funds to meet a large unexpected expense or if you wanted to take that foreign vacation that you were longing for or maybe you want simply to consolidate your multiple small loans, all of that is possible with a Personal Loan.  Personal Loans are an important source of funds to address many requirements. Personal Loans are unsecured loans, i.e., not secured by any collateral unlike your Home Loan or Vehicle Loan. Therefore, banks and Non-banking finance companies (NBFCs) that offer Personal Loans scrutinise Personal Loan applications more carefully. They look at your credit score, employment history, your current income, repayment capability based on present outflow on other existing loans and your repayment track record.

Please continue to read further to learn more about how banks and financial institutions evaluate different factors to determine your Personal Loan Eligibility.

Your Credit Report and Credit Score

When you apply for Personal Loans, banks usually obtain your credit report and credit score, which is commonly referred to as credit score. There are three credit monitoring agencies, and lenders typically rely on one or more of these credit bureaus. CIBIL is most the most popular bureau among all. Your credit report is linked to your Permanent Account Number (PAN). Your credit report contains not only your credit score but also other details such as your date of birth, your address history, your employment details, details of various loans and Credit Cards, whether there were any delayed payments, defaults on any loans, and so on. Your credit report also contains details about your credit utilisation on your Credit Cards and list of recent enquiries/applications for loans/credit you may have done. Any loans that are defaulted or delayed equated monthly instalment (EMI) payments will negatively impact your credit score. Higher credit utilisation and more credit enquiries will show you as credit hungry and may adversely impact your score.

You should obtain your credit report and credit score and check for any discrepancies. If there are any errors in address, contact details, employment details or if you dispute any item on your report, you must get them rectified by writing to the credit bureau. If there are any unused Credit Cards, you can improve your credit score by simply closing those accounts. If there are any past unpaid loans, they will show up on your credit report, and it will help to pay off those debts and request the lenders to update the records. Higher the credit score, better your chances of getting your loan approved. Credit Score is a three-digit number that has a range of 300 to 900 with 900 as a maximum possible credit score. Credit scores of above 650 are considered fair, above 750 are considered good,and 800 plus scores are excellent. If you have a credit score of 700 or above, banks and financial institutions will view your Personal Loan application favourably.

Employment History

Banks typically want to extend Personal Loans to salaried class as they are assured of regular monthly income and are likely not to have any repayment issues. Therefore, they look at your employment history, how often you have changed jobs and how long you have held your present job, and so on. If you have hopped from job to job too frequently or if you are self-employed, banks look at you as a riskier borrower. If you are self-employed, you will have to provide proof of history of regular income in your profession or business to meet Personal Loan eligibilityrequirements.

Current Income and Expenses

Your total monthly income and your total monthly outflows which must include your monthly expenses and your EMIs on your present loans will determine how much Personal Loan you are eligible for. Banks will calculate your total monthly outflows and subtract that from your net income after taxes to determine how much you will have left to pay the EMI on your proposed loan. This will determine the quantum of your Personal Loan eligibility, tenure, and so on.

Equated Monthly Instalment

Banks typically have guidelines for interest rates and tenures for different types of loans. Interest rate and tenure will determine the EMI that must be paid, and this is very important to consider whether you can afford to pay this with your present income and expenses.

Other Personal Loan Eligibility Checks

Besides the main factors we discussed above, other factors may play a role in determining your eligibility for a Personal Loan. Nature of employment and length of your employment with the present employer will play a key role in deciding your eligibility. Employees of Central and State Governments, Public sector companies, Public listed companies will get preference and may qualify for higher loan amounts. Sometimes, the purpose of loan also will play a role in determining your eligibility amount. Some banks will consider your age, and if you are close to your retirement or a senior citizen, it is difficult to get a Personal Loan. Some lenders will consider whether your own or rent your home and your length of stay at the present address. If you have stayed at the same address for long, it is likely to be viewed positively. Sometimes, it is easier to get a Personal Loan if you have a prior banking relationship with the bank.

Banks and NBFCs determine your eligibility based on all the factors we discussed above. You can check your eligibility using an eligibility calculator to find out if you are a good candidate for the Personal Loan. You can search for various Personal Loan options at online lending marketplaces and compare the interest rates, processing fees, pre-payment penalties and other features and apply for the same. Axis Bank Personal Loan is a great option if you are looking for a quick loan with minimum documentation and speedy approval. Once you take the Personal Loan, you must make your EMI payments regularly and on time. This will build and improve your credit history,and when you need a loan in future, it will make things easier for you to qualify.

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