Here is Everything You Need to Know Before Applying for a Personal Loan

Recent data from the Reserve Bank of India shows an increased reliance on personal loans, resulting in an uptick in credit growth in January 2023. According to RBI’s data, retail loans have increased by 20.4% since last year. Even consumption loans grew by 25.6% year-on-year, with financial institutions making it extremely simple to obtain quick loans through mobile applications.

Personal loans provide much-needed credit to individuals and entities to meet their financial obligations. Although the contribution of unsecured loans to the total retail loans witnessed a decline in FY22, it is once again picking up pace in FY23. As per the data provided by India Ratings and Research, unsecured loans contributed 35.5% to the total retail loans from April to December of FY23. This was slightly up from the 35% share in FY22.

Personal Loan Eligibility Criteria

As the numbers suggest, many individuals and entities rely on unsecured loans to address their current financial needs. Whether you have a medical emergency or need to accrue funds for a wedding, you can approach banks and NBFCs to apply for a personal loan. With financial institutions loosening their lending terms and guidelines, applying for a personal loan has become easier than ever. However, it is important that you are aware of the personal loan eligibility  before approaching a lender.

While different lenders have their own specific guidelines, in general, you have to meet the basic eligibility criteria. These include:

• Age: Lenders typically sanction personal loans to individuals between 21 years (when you apply for a loan) and 70 years (by the time you repay the loan).
• Credit Score: It is beneficial to have a credit score of 750 or above. However, this isn’t a deal-breaker, as lenders offer loans to individuals with a credit score of less than 750.
• Income: You must draw a minimum salary of around ₹10,000 - ₹15,000 per month. However, this varies from one lender to another.
• Employment Status: You must be salaried or self-employed applicant.

Lenders perform a thorough background check, and read your credit report to gauge your creditworthiness. If you have defaulted before or haven’t managed your finances responsibly, you may not be eligible to get a personal loan.

Factors Influencing Personal Loan Eligibility

A poor credit history can hamper your chances of obtaining a personal loan. Knowing the factors that influence your personal loan eligibility is also important. Doing so will help you make the right decisions while managing your finances.

Credit Score: The most crucial factor determining your chances of getting a personal loan – and at what interest rate – is your credit score. Generally, applicants with a credit score of 750 or above are considered financially responsible and are deemed risk-free. Such applicants get their loan applications approved fairly quickly, and enjoy nominal interest rates. Thus, you must first check your credit score before applying for a loan.

Furthermore, while lenders tend to prefer applicants with a good credit score, you can still avail of a loan with a score of less than 750. However, the downside is that lenders levy higher interest rates against the loan amount.

• Minimum Income: Receiving a decent paycheck every month indicates that you are more likely to make payments on time. This is the rationale behind the minimum income requirement. Different lenders have different minimum income requirements.
• Employment Type: Another key factor determining your personal loan eligibility is your employment type. Lenders prefer sanctioning loans to salaried individuals, who are more likely to get a guaranteed monthly paycheck.
• Age: While there are lenders that provide loans to individuals who are 18 years old, most financial institutions grant loans to applicants who are at least 21 years old. Individuals between 21 and 50 years old can avail of loans against competitive interest rates.
• Work Experience: If you are a salaried employee, you must have a minimum work experience of 1-2 years. Furthermore, you must be working at the same organisation for 6 months - 1 year. On the other hand, self-employed individuals should have been in their current business for a minimum of 2 years.
• Repayment Capacity: Lenders also look at your repayment capacity, measured by the debt-to-income (DTI) ratio or net monthly income (NMI) ratio. The ratio provides insights into what percentage of your monthly income goes towards repaying your existing debt. Ideally, your DTI/NMI ratio shouldn’t be more than 40-50%.

Benefits of Obtaining a Personal Loan

Once you check your credit score and ensure you fulfil the eligibility criteria, you can apply for a personal loan. These unsecured loans come with numerous benefits, which are highlighted below.

• Quick and Hassle-Free Processing: With banks and NBFCs offering quick loans through mobile apps and websites, you can apply for a personal loan easily.
• Unsecured Loans: You don’t have to pledge any collateral to obtain a personal loan, as these are unsecured loans.
• Instant Disbursal: If you are in urgent need of funds, you can apply for a personal loan and obtain it within 24-48 hours! Banks and NBFCs offer their existing clients personal loans with instant disbursals, especially if you have a good credit profile with impeccable repayment history.
• Minimal Documentation: You don’t have to go through a lengthy documentation process to apply for a personal loan.
• Flexible Repayment Terms: You can repay the loan in monthly instalments over a 12-60 month period. Thus, you can make bite-sized instalments and ensure you never miss a payment.
• All-Purpose Use: One of the biggest benefits of obtaining a personal loan is that you can use it to meet urgent financial obligations, book a vacation, or even buy a new phone. There are no restrictions; you can use the amount at your discretion.

Tips to Improve Your Chances of Getting a Personal Loan

Once you check your credit score and ensure that you meet the personal loan eligibility criteria, you can apply for the loan. However, if you fall short, here is how you can improve your chances of obtaining a personal loan.

• Improve Your Credit Score: First and foremost, you must improve your credit score. This can be done by paying your credit card bills on time, and repaying some – or all of your existing debts. You can keep checking your credit score from time-to-time, and ensure that it increases over 6-12 months. If you receive a raise, you must bring it to the notice of the credit bureau, which will help your case.
• Add a Co-Applicant: You can add a family member, such as your spouse, mother, or father, with a good credit score as a co-applicant. However, not all financial institutions currently allow co-applicants while applying for a personal loan. Having a co-applicant or a co-borrower can improve your chances of getting a personal loan.
• Get Your Finances in Order: Ensure that you become more financially responsible. You can prepare a monthly budget and build a good credit history with a DTI/NMI ratio of less than 50%.
• Avoid Applying for Multiple Loans: Lastly, avoid applying for multiple loans simultaneously. Lenders get your credit report from credit bureaus to evaluate your creditworthiness. However, applying for multiple loans at once will paint a negative picture and make you look like a credit-hungry borrower. If the lender believes you are reckless with finances, they will not approve your application, or offer loans against very high interest rates. Furthermore, multiple ‘hard inquiries’ will result in your credit score dropping by a few points.

By keeping these pointers in mind and checking your credit score to improve your personal loan eligibility, you can successfully apply for a personal loan.

(Above mentioned article is a consumer connect initiative, This article is a paid publication and does not have journalistic/editorial involvement of IDPL, and IDPL claims no responsibility whatsoever.)