A personal loan is financial aid sought out by individuals looking for funds to meet their personal needs. The most distinguishing feature of a personal loan is that it can be used for any of your personal needs without any restriction on the end-use.
There are various types of loans like home loans, car loans, education loans, farm loans, equipment loans, etc. But these loans are restricted by the end use of the loan amount. However, a personal loan doesn’t have this restriction. This feature allows individuals to use loan funds to meet a variety of purposes like wedding expenses, vacation plans, home renovations, higher education, etc. In fact, many individuals seek a personal loan to pay off some of their high expense loans like credit card bills.
This flexibility in the end-use and instant accessibility of personal loan makes it the most sought after loan product in the market.
A Personal Loan may be a short term commitment, however, banks do conduct a thorough scrutiny of the personal loan eligibility criteria to make sure that the loan doesn’t turn bad. Here are some of the factors that help banks in determining your personal loan eligibility:
Credit Score - Your credit score and credit report are the most important factors in determining whether or not your personal loan will be approved. The RBI has given permission to four credit rating agencies, or credit bureaus, to issue credit reports and ratings. They compile and maintain records of all the credit-related transactions in collaboration with banks, credit card firms, and other structured lenders.
The bureaus submit monthly reports from these lenders on all of your credit transactions. This includes information on your EMI and credit card payments (including any late or missed payments), balance due, any changes to your total credit cap, and any other relevant information.
Based on all of this data, a complex mathematical formula is used to calculate your credit score. The score is a measure of your past and current credit conduct that prospective lenders may use to get a sense of your creditworthiness. If you have a good track record of making all of your payments on time and in full, your score would tend to be high. If you have a history of missing payments or overusing credit, it can have a negative impact on your credit score.
Employment Type and Employer - Someone with a history of regularly changing employment may not be readily eligible for a personal loan because it means that during the loan term he/she may not have a steady or predictable income and may not be able to make regular payments. Being in a job for at least a year before you apply for a personal loan is probably a smart idea.
Your employment is also taken into account during the loan approval process. Since personal loan borrowers do not have any assets to pledge as collateral, lenders must guarantee that you will have a consistent monthly income over the term of the loan, allowing you to make timely payments. That is why they are concerned about your employment situation. They’ll look at whether you’ve had consistent employment and whether you’ve been in the same place for a long time.
Income - Another important factor to remember is the average income. Since there is no collateral, the banks want to know that you have a respectable income (from salary and other sources) that will enable you to make your monthly repayments. Having a handsome salary with low liabilities (other debts) makes you be accepted for a personal loan.
Your EMI payment history is also of interest - Lenders will examine your credit report to see whether you have a history of financial stability and prompt EMI payments. They are more likely to consider your loan request favourably if they see that you have made regular payments and fulfilled your debt obligations.
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