New Delhi [India], September 13 (ANI/ATK): Personal loan is among the most preferred loan options for individuals requiring quick loan disbursals. Personal loans come with benefits like minimal paperwork, quicker disbursal, no requirement of collateral and zero restrictions in terms of end usage of funds. However, banks and Non-Banking Financial Companies (NBFCs) need to exercise caution while evaluating personal loan applications because of the unsecured nature of these loans. Some of the most important factors that lenders consider while evaluating the personal loan eligibility of a loan applicant are listed below.

Credit Score

Credit score is one of the first filters that banks and NBFCs use for assessing personal loan applications. Loan applicants having credit scores of 750 and above are considered creditworthy and hence, they have a higher chance of getting their personal loan applications approved. Some lenders also offer personal loans at preferential interest rates to their loan applicants with higher credit scores. As personal loan applicants with credit scores below 750 are usually considered as lacking in credit discipline, lenders may either reject their personal loan application or levy higher interest rates to make up for their higher risk of loan default.

As the requirement for taking a personal loan can arise anytime, checking your credit score just before submitting the loan application may not be very useful. Instead, you should develop the practice of reviewing your credit report at regular intervals. Doing so will give you adequate time to take corrective actions and improve your credit score. You can also maintain/improve your credit scores by following healthy credit practices like repaying your EMIs and credit card dues by their due dates, maintaining your credit utilisation ratio within 30 per cent, avoiding multiple loan/credit card applications within a short span of time, monitoring loans guaranteed/co-signed by you, etc.

Timely review of your credit reports will also help you identify any clerical errors or incorrect information present in your credit reports and then report them to your respective lenders and credit bureaus for correction. A rectified credit report will automatically enhance your credit score and help to boost your personal loan eligibility.

EMI repayment capacity

As with all other loan types, banks and NBFCs consider a personal loan applicant's repayment capacity while evaluating their loan applications. Lenders usually require personal loan applicants to maintain their monthly loan repayment obligations (including the EMIs both from their existing loans and proposed personal loan) to be within 50-60 per cent of their total monthly income. Personal loan applicants exceeding this limit usually have lower chances of getting their loan application approved by the lender. As longer tenures lead to lower EMIs, personal loan applicants going beyond the 50-60 per cent limit should select longer loan tenures to reduce their monthly EMIs and subsequently enhance their repayment capacity.

Employment profile

Banks and NBFCs consider the employment profile of loan applicants while approving their personal loan applications. Some lenders also consider the employment profiles of their personal loan applicant for deciding their interest rates. Lenders usually prefer salaried employees over non-salaried ones because of the higher income certainty of the former. Among salaried personal loan applicants, those working with the public sector are the most preferred followed by those working with reputed private sector corporates. For example, the SBI personal loan interest rates for PSU and central/state government employees under the bank's Xpress Credit Scheme is lower than the personal loan interest rates offered to private sector employees. Similarly, among the non-salaried individuals, professionals like doctors and chartered accountants have higher chances of securing approval for personal loans at lower interest rates.

Existing consumer relationship with the banks and NBFC

Many banks and NBFCs offer pre-approved personal loans at preferential interest rates to their existing customers. Such relationships are either in the form of savings, salary, current or fixed/recurring deposit accounts or because of their existing credit card or other loans. Thus, existing customers looking to avail personal loans should first contact their respective bank or NBFC with whom they share any existing banking and/or lending relationships. Personal Loan applicants can use interest rates offered by such lenders as a benchmark to compare with the personal loan interest rates provided by other banks and NBFCs.

Bottom line

Your personal loan eligibility and interest rates can vary across lenders based on their risk appetite and credit evaluation processes. Hence, personal loan applicants should gain a better understanding regarding their personal loan eligibility. They can visit online financial marketplaces to look at multiple personal loan options based on the credit score, income, employer's profile, occupation profile, repayment capacity etc. of the personal loan applicant. Doing so would also eliminate the risk of any negative impact on your credit score for making loan enquiries with multiple lenders. Any loan enquiry made directly with a bank or NBFC is considered as a hard enquiry, which reduces your credit score by a few points. Thus, multiple hard enquiries within a short span can drastically reduce your credit scores and thereby, decrease their chances of personal loan approval. Credit report requests made by online financial marketplaces are considered as soft enquiries, which do not adversely impact your credit score. Thus personal loan applicants can check credit reports multiple times, while checking the personal loan options provided by them, without worrying about any reduction in their credit scores.

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