A personal loan (PL) is an unsecured loan, meaning you don’t need to provide collateral to borrow funds. Its versatility makes it a popular choice for various financial needs from medical emergencies and debt consolidation to weddings and travel. However, since it’s unsecured, lenders usually have stringent eligibility criteria to minimise their risk.
Understanding these criteria is crucial not just to secure the loan, but also to ensure you can negotiate terms that suit your financial goals and stability.
In this article, we break down the top 5 things you need to know about personal loan eligibility, so you can make informed decisions and apply with confidence.
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Top 5 Things to Know About Your Personal Loan Eligibility
Understanding the factors that affect your PL loan eligibility can help improve your chances of approval with favourable terms.
1. Your Credit Score
Your credit score is one of the most critical factors lenders evaluate while assessing loan eligibility. This three-digit number, typically ranging from 300 to 900, reflects your creditworthiness based on factors like repayment history, credit utilisation, and outstanding debts.
Why Credit Score Matters
Lenders look at credit scores to evaluate the potential risk involved in lending money. A higher score indicates strong financial discipline and reliability, while a lower score suggests potential challenges with repayment.
What Is a Good Credit Score for a Personal Loan?
While requirements can vary by lender, a score of 750 or higher is generally ideal. This range not only improves your approval chances but also increases the likelihood of qualifying for lower interest rates.
How to Monitor and Maintain Your Score
- Regularly review your credit report to spot any errors or discrepancies that could negatively impact your score.
- Stay on top of your EMIs and credit card payments by making sure they’re paid before the due date.
- Keep your credit utilisation ratio below 30% of your total credit limit to demonstrate responsible borrowing.
2. Your Income and Employment Stability
Lenders assess your income not only to determine your ability to repay the loan but also to evaluate your overall financial stability. Generally, lenders prefer applicants with a steady monthly income and a consistent employment history.
Why Income Stability Matters
A stable income is essential for lenders to ensure that you can meet your repayment obligations consistently. Lenders also assess factors such as the length of your employment, which might impact your perceived financial stability.
What Is the Ideal Income?
While minimum income thresholds vary from lender to lender, applicants in major cities like Delhi and Mumbai often require a minimum monthly income of around INR 25,000. For applicants from other cities, the minimum income is typically INR 20,000. For self-employed applicants, lenders typically consider annual profits after taxes.
3. Your Debt-to-Income Ratio (DTI)
The DTI ratio is another critical metric that lenders use to assess your repayment capacity. It helps them understand how much of your income is already allocated to repaying existing debt.
Why DTI Ratio Matters
Lenders typically prefer a DTI ratio of 30% or lower. A high DTI ratio suggests that a large portion of your income is already committed to repaying debts, which could indicate financial strain and increase the risk of defaulting on new loans. A lower DTI ratio demonstrates a greater ability to manage additional debt and indicates a healthier financial profile.
How Is the DTI Ratio Calculated?
DTI = (Monthly Debt Payments / Monthly Gross Income) × 100
For instance, if your monthly debt payments amount to INR 30,000 and your monthly income is INR 1,00,000, your DTI would be 30%.
4. Your Age
Age is an important factor when it comes to personal loan eligibility. Many lenders in India require borrowers to be at least 22 at the time of loan application and not exceed 65 at the time of loan maturity. This age bracket ensures that borrowers are capable of handling financial responsibilities and will be able to complete repayment before reaching retirement age.
Why Age Matters
Lenders consider age as it relates to earning potential and financial stability. Younger borrowers may be viewed more favourably as they have more earning years ahead of them.
5. Required Documentation
An incomplete application can delay your loan approval or even lead to rejection. To ensure a smooth application process, make sure to prepare the following general documents:
- Identity Proof: PAN card, Aadhaar card, or passport.
- Address Proof: Aadhaar card, passport, or driving licence.
- Income Proof:Salary slips for the last 2-3 months, IT returns for the last 2 years, or bank statements for the last 6 months.
Why Documentation Matters
Lenders require these documents to verify your identity, financial stability, and eligibility. Always check for lender-specific requirements to ensure you have all the necessary documents before applying.
Note: The final loan eligibility is subject to various factors, including the lender’s specific policies and evaluation criteria.
Conclusion
Understanding personal loan eligibility is crucial for positioning yourself as an ideal and low-risk borrower. By improving your credit score, managing your DTI ratio, and ensuring your documentation is in order, you can significantly increase your chances of approval and secure better loan terms. If your loan application is rejected, take the time to understand the reasons behind it and work on addressing those areas before reapplying.
*T&C apply. Please note that final approval, loan terms, and disbursement process may vary based on lender policies and borrower’s eligibility.