5 Factors That Determine Your Eligibility for a Personal Loan

With the improving lifestyles and growing demands of Indian consumers, many lending institutions have started providing online Personal Loans without branch visits or physical paperwork. Getting a loan has become easy due to 100% digital loan procedures, simple eligibility for Personal Loan conditions, and minimal documentation requirements of modern Non-Banking Financial Companies (NBFCs). Therefore, Personal Loans can meet emergency requirements by providing fast and easy cash. 

Whether an individual needs funds for medical emergencies, holidays, weddings, home renovations, higher education, and other planned or unplanned expenses, a Personal Loan is an attractive way to obtain unsecured funds with quick online loan processing. However, like any other type of loan, Personal Loans have eligibility conditions that borrowers must fulfil to receive the required funding. Below are the top five factors that determine an applicant’s Personal Loan eligibility and tips to improve it.

Five Factors Affecting Personal Loan Eligibility 

Below are the top five factors that affect an applicant’s Personal Loan eligibility:

• Credit Score

A loan seeker’s credit score is crucial in determining whether they are eligible for a loan and what interest rate the lender will charge. It shows an individual’s financial history, like their borrowing history, repayment habits, etc. If the score is decent enough, it is easier for them to obtain a Personal Loan. However, if it is less than the lender’s minimum requirement, the chances of getting loan approval are slim. Some lending institutions might offer bad credit Personal Loans to loan seekers with low credit scores, but their interest rates are usually steep, significantly increasing the loan cost.

To obtain easy loan approval, one must maintain a high credit score that implies that the person has taken multiple types of loans in the past and repaid them on time. Those with a good credit rating stand out as creditworthy borrowers. Lending institutions believe that such applicants are regular with their loan repayments. As a result, they approve and disburse their loans quickly at competitive rates and conditions. So, to improve eligibility for a Personal Loan, loan seekers must become regular in their existing loan repayments. It will eventually work in their favour and improve their credit score and eligibility for future loans.

• Income

The applicant’s income is another crucial factor determining the Personal Loan eligibility. The reason is simple – the more they earn, the likelier they are to make timely EMI payments. Salaried employees must have a decent monthly income to prove their repayment capacity. Finding additional income sources is an excellent way to increase disposable income and get easy approval. Additionally, self-employed professionals must prove consistent income to qualify for a Personal Loan.

As an individual takes a loan, they must repay it in EMIs each month. Those with a sufficient income will have enough funds left after paying their financial obligations like rent, clothes, food, bills, etc. Generally, a Debt-to-Income (DTI) ratio of less than 30-40% is good enough to qualify for a new loan. One may lower their DTI ratio by finding additional income sources, paying outstanding balances, increasing credit limits, etc. 

• Employer

An applicant’s employer is a crucial factor based on which loan providers gauge their creditworthiness. Working in a high-turnover organisation is advantageous for getting the best loan offer. Such, salaried employees have a stable and secure future with steady employment. On the other hand, those working in an MSME, start-up, or proprietorship have a risky future because their employer’s business may shut down anytime, jeopardising their financial future. That is why most loan providers prefer MNC employees over applicants working in other small companies.

• Job Stability

Job stability is another crucial factor determining an individual’s eligibility for a Personal Loan. Generally, applicants must have a few months of experience in the current profession with decent overall work experience. These conditions apply to salaried individuals. Self-employed professionals must show a good work experience with a decent turnover. 

Lending institutions gauge applicants’ Personal Loan eligibility based on their job stability. It shows their repayment capacity and financial condition to qualify for a loan. So, stability in the current job or industry shows financial constancy in loan repayment as well. Alternatively, loan providers do not trust applicants with multiple job changes and employment gaps, as it becomes tough for lenders to decide whether they can pay their EMIs regularly.

• Age

Age shows an individual’s earnings and financial steadiness to the lender. The younger the applicants are, the better their chances of getting a loan. Financial institutions believe that young people have more capacity to earn money and repay their loans on time. 

Tips to Improve Personal Loan Eligibility 

Those looking for a Personal Loan must follow these tips to improve their eligibility and get a better loan offer:

• Repaying existing loans and credit card balances before applying for a new loan
• Clearing all dues in full and on time
• Maintaining a positive repayment history
• Consistently maintaining a decent credit score 
• Showing additional income sources, including incentives, income from hobbies, rental income, variable pay, etc.
• Reducing credit card usage

Personal Loans help meet various financial needs without collateral, security, or guarantor. However, before applying for a loan offer, one must check the lender’s eligibility criteria and ensure they are easy to fulfil. An individual’s eligibility for Personal Loan depends on several factors, including age, employment, income, financial obligations, etc. Fulfilling these conditions will show the applicant’s current standing before getting loan approval and help them get the best loan offer.