According to the data released by the Reserve Bank of India, the personal loan segment has escalated by 12.3% in FY22. The significant growth is indicative of the robust demand for this credit option. A bulk of the population falls back on a personal loan as it helps mitigate financial shortfalls with utmost convenience.
Moreover, applying for a personal loan is feasible as it is a collateral-free credit option with less stringent eligibility criteria and simple documentation. However, to receive quick loan approval, borrowers need to adhere to the personal loan eligibility criteria set by lenders. Financial institutions lay out eligibility criteria to ensure borrowers do not falter on loan repayments.
7 Factors Affecting Personal Loan Eligibility
Borrowers have to weigh the following factors if they need a personal loan:
1. Repayment history: Repayment or credit history is vital in the loan approval process. Lenders examine borrowers’ repayment records to ascertain the risk of lending the loan amount. Borrowers’ repayment history reflects on their credit scores. Multiple loan applications, delayed or missed EMI payments, etc., negatively impact the repayment history and projects one as a high-risk borrower. Hence, lowers their chance of loan approvals.
2. Borrower’s age: Borrower’s age is a significant parameter in determining personal loan eligibility as it provides insight regarding his/her financial stability and earning potential. If applicants are nearing retirement age, the chances are high that their loan applications will get rejected or that lenders will charge a high-interest rate on their sanctioned loan principal.
Hence, borrowers must abide by the age bracket set by lenders to be eligible for the credit option.
3. Monthly income status: Borrowers’ monthly income is directly linked to their potential to repay the sanctioned loan amount. Hence, borrowers with steady income sources are considered reliable and receive instant loan approval at the lowest personal loan interest rate.
Applicants with long work experience are also preferred over an individual who is a novice in a firm. Moreover, borrowers employed in a reputed firm have a higher chance of receiving quick loan approval than one working at a start-up.
4. Loan repayment term: Another pointer based on which borrowers qualify for a small personal loan is the loan repayment term. Lenders might reject a loan application if a borrower has opted for a higher loan amount for a shorter repayment tenor.
Opting for an extended loan tenor will help one repay the substantial loan principal comfortably. Hence, borrowers must find the right personal loan tenor that works in favour of their repayment capabilities.
5. CIBIL score: CIBIL score is the three-digit numerical summary of a borrower’s creditworthiness. A personal loan is an unsecured financing option, so credit score becomes a vital metric that lenders consider while approving a personal loan application.
It significantly impacts the loan principal and interest rate. A credit score of 750 and above is considered ideal. It enhances personal loan eligibility and is favourable for fetching better loan terms. Borrowers with substandard CIBIL scores must know how to improve their personal credit scores before applying for the credit option.
6. Debt-to-income ratio: DTI or Debt-to-income ratio is a financial measure that helps gauge one’s monthly debt payment with respect to their gross monthly income.
Before approving a personal loan application, lenders also check the borrower’s debt-to-income ratio to determine how effectively borrowers can manage to repay the loan amount.
7. Current debt: Besides checking the repayment history, lenders also scrutinise whether borrowers have any existing debt liabilities like credit card payments, outstanding debt from student loans, mortgages, etc., to know whether borrowers will be able to repay the loan amount after managing the existing financial liabilities.
Moreover, Lenders might reject the personal loan application if they find discrepancies in the repayment record or deduces that the borrower is already swamped under too much debt to manage and repay another loan amount. Alternatively, lenders will approve loan amounts at a higher interest rate.
Hence, borrowers need to keep a check on existing debts and improve their chances of getting approval for a personal loan.
Knowing how to enhance eligibility for this versatile credit option will help borrowers make an informed decision and allow them to reap the notable features and benefits of a personal loan.
Once borrowers qualify for the loan amount, they will be able to reap the benefits of the pre-approved offers extended by several financial institutions on various financial products like personal loans, business loans, credit cards, etc. Intending borrowers can check their pre-approved offers by submitting their names and contact number.
To sum up, a personal loan is an effective credit option that mitigates financial gaps and helps one sail through monetary urgencies. However, to make the loan application successful, borrowers must abide by the personal loan eligibility criteria set by lenders and know the intricacies that help them qualify for quick loan approval.
Tips To Reduce The Interest Rate On Personal Loan
Individuals need to follow the strategies mentioned below to secure a lower interest rate:
The interest rate is not the same for all lending institutions. Before accepting a loan offer, individuals need to compare this rate across lenders. This way, they will be able to find a financial organization charging a lower rate on a personal loan.
Opting for a Balance Transfer
The balance transfer facility lets existing borrowers move their loan accounts to another financial institution. They need to find a lender offering the lowest interest rate on personal loans and transfer their existing obligation to that lender. It will help them enjoy the new interest rate on their outstanding debt.
Also, Check – The Process to Get a Mortgage
Maintaining a Healthy FOIR
Lending institutions check the FOIR (Fixed Obligations to Income Ratio) of the applicants while approving the personal loan applications. When individuals have fewer monthly obligations (debts, credit card bills, etc.), they can repay their loans easily. Such individuals can negotiate with their lenders to reduce their interest rates.
Furthermore, several lenders in India also help their customers to meet their credit shortages instantly with pre-approved offers. These are special loan offers tailored for customers on their financial products, including personal loans, business loans, and credit cards. They can expedite their loan application processes by accepting these special deals. They only need to mention their credentials, including their names and contact details to check their pre-approved offers.
In conclusion, being an unsecured credit facility, financial institutions put significant stress on personal loan eligibility factors to reduce their risk of repayment failure. Individuals must meet these criteria properly to ensure a quick and hassle-free loan application process. It also helps them get this credit assistance quickly.
A personal loan can be significantly helpful in meeting emergency credit shortages. During this credit crisis, fraudsters can easily take advantage of them and push them into financial peril. So, they need to be aware of popular personal loan scams and how they can avoid them.
Furthermore, major lending institutions also extend pre-approved offers to their existing customers on their financial products, such as business loans, personal loans, and credit cards. Accepting these tailored loan offers can ensure a quicker loan application process. It only takes them to share their names and contact details to check their pre-approved offers.
In conclusion, lending institutions mainly assess the repayment potential of applicants while approving a loan application. Lenders deem individuals with higher repayment capacity as less risky and get confidence that they will pay their dues timely. As a result, those applicants can negotiate for a lucrative personal loan interest rate.