Credit is a well-known term in today’s world, where people have endless needs and ever-increasing spending power. It comes in many forms, such as credit cards, mortgages and many others. Particularly for young individuals who handle several financial liabilities, it often happens that some financial needs come up without forewarning. If you have recently started your career, you might have some funds kept aside for emergency needs. However, in some circumstances, you need more money than you have. It is where taking a personal loan is a wise choice.
A personal loan is a collateral-free loan made available by most banks and Non-Banking Financial Companies (NBFCs) at a low-interest rate. Since it is unsecured, the lenders consider several parameters to determine the creditworthiness of young individuals. The rate of interest charged on a personal loan varies from one person to the other.
Before you apply for a personal loan, it is crucial for you to know how lenders will check for your eligibility for a specific loan amount.
Factors Affecting Personal Loan Eligibility
1. Employment Type
Before offering you a loan amount, the chosen lenders want to ensure if you will be able to repay the loan on time. That’s why they first check your employment type – whether you are a salaried individual or self-employed. If you work for a reputable company, you can easily get approval on your personal loan application in comparison to someone who does not have a stable income source. Furthermore, the lenders also evaluate your firm’s risk profile while offering you a personal loan.
2. Credit Score
A credit score or CIBIL score is one of the most crucial factors that determine your personal loan eligibility. It is a number that shows your credit and repayment history to the lenders. For instance, a high credit score above 700 means you have taken loans in the past and have repaid them timely. On the other hand, you might have a zero credit score if you have never borrowed any loan previously or do not use a credit card. So, it is crucial that you keep a check on this score with time.
3. Existing Debt/Loans
If you have previously taken a personal loan or any other loan, you can’t hide that information from a lender. It is because your credit score says a lot about your experience of borrowing and repaying loan money. Borrowing multiple loans does not generally become a problem while seeking approval for a personal loan unless you have unpaid dues accumulated at your end. Most of the banks pay special attention to the repayment pattern of individuals applying for a personal loan. So, be careful about paying the EMIs of your existing debt obligations timely to get a personal loan on easy terms and low interest rate.
4. Income
Your total regular income from all sources influence your personal loan eligibility. Your income will tell the lender if you are able to repay the loan in easy EMIs along with other EMIs of existing loans if any. That’s why all banks ask for income proof before approving personal loan applications.
You might have even found that many lenders have a fixed minimum income criterion to process personal loans. Take the example of Axis Bank – a renowned bank in India that has set the bar of minimum net monthly income to Rs. 15,000 for personal loan applications. Whichever bank you choose, make sure you know about such criterion beforehand.
Borrowing a personal loan is a viable option in several life situations where you need extra funds. You can use the amount for just about anything. However, it is crucial to borrow it for responsible reasons so that it won’t act as a monetary burden in your young life. Be sure to choose a reputable bank and weigh your options carefully.
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