Personal Loan Eligibility Criteria
While lending money the lenders take into account various factors to arrive at the decision whether to lend the money or not and how much to lend. This universal rule of lending equally applies to personal loans extended by the banks and Non Banking Finance companies (NBFC). Since personal loans are given without any security or third party guarantee, the lenders are extra cautious and have stringent norms for establishing eligibility of borrower.
Profile of the borrower
A lender advances loan in the expectation of it being repaid within specified period. So income of the borrower is the main criteria to establish the eligibility for personal loan. Due to this reason, students, housewives and retired people are not eligible for personal loan facility from the banking system. Since a loan has to be repaid within certain period and that too with the current income, one can avail personal loan during his working life and not beyond that.
Salaried people can apply for personal loan anytime between 21 years till completion of 60 years of age assuming that the age of retirement is 60 years. In case the age of retirement specified for any particular organisation is lower than 60 years, the eligibility to apply for the personal loan will come down accordingly.
Since self employed do not have any specified age for retirement and generally work beyond 60 years they can apply for personal loan upto 65 years of age. Moreover as self employed do not start earning as early as a salaried, the minimum age for applying for personal loan for self employed is generally kept higher at 25 years.
As a lender is interested in the timely and orderly serving of personal loan, regular flow of income is a prerequisite for availing a personal loan. So the lenders advance personal loans to the persons who have regular and consistent income. Those who are in employment, should at least be working for minimum of two years. At least one year with the current employer is generally also insisted by the lenders. Likewise for self employed the lenders want consistent and established source of income, for which the borrower has to submit documents like profit and loss account with balance sheet for at least two previous completed years to substantiate the income. Due to irregular source of income, film and television artists generally find it difficult to get a personal loan.
For establishing your eligibility you need to submit some financial documents to the lenders in addition to your regular Know Your Customer (KYC) documents. For salaried the financial documents required to be submitted are simple. Copies of the salary slips for past six months along with form no. 16 and or copy of the Income Tax Return (ITR) filed for previous two years are sufficient. However for self employed elaborate set of documents are needed to be submitted to the bank. The self employed have to submit copies of their ITR along with certified copy of profit and loss account along with balance sheets for previous two years are needed. The lender may also ask for copy of the bank statement to verify the volume of the business stated in the profit and loss account.
Since personal loans are very risky product from the lender’s perspective, the lender wants to ensure that the borrower will be prompt and regular in servicing the personal loan. For this purpose, the lenders take into account the employer where you are working, to assure themselves about lower risk of default on the part of the borrower. Most of the lenders have a categorised list of employers for the purpose of granting personal loans to salaried people.
People working with government department and those with government companies have better opportunity for being eligible for personal loan than those working with other employers. Likewise persons working with top listed companies or reputed private companies including Multi National Companies have better prospects of getting a personal loan.
Lenders assume that certain portion of your existing monthly income, generally 40%, is available for servicing of any loan taken by you. So your personal loan eligibility gets curtailed in case you are serving any existing loan. The amount of EMI of such existing loan being served will be reduced from the surplus available for serving any loan. Accordingly the amount of EMI which you can service for personal loan will also come down accordingly. As the amount of personal loan eligibility depends on how much EMI you can pay month after month, any running loan will significantly reduce your personal loan eligibility. In case the balance EMIs for running loan are not many, you can arrange to prepay that existing loan and thereby significantly enhance your personal loan eligibility. In such a situation, the personal loan eligibility will be higher than the balance of the existing loan outstanding being repaid.
Credit history of the borrower
With the advent of credit information bureau like CIBIL, the lending for banks and NBFCs has become easier as the complete history of credit transactions of the prospective borrowers is available to the lender. The credit information bureau provides the credit history and credit score of the borrower to the lending institutions on request. A good credit history and higher credit score, points towards disciplined dealings in credit and loan transactions. A good history and a better credit score provides a primary assurance to the lender about the borrower timely serving the loan taken. Moreover with higher credit score, the lender may give you higher personal loan than what you would be eligible with lower score.
A better credit score also help you negotiate and get better interest rates on your personal loans with higher eligibility at the same time. Generally a CIBIL credit score of more than 750 is considered satisfactory and higher the score higher comfort the lender gets and better terms the borrower can ask for from the lender.
Since the repayment of a personal loan has to be made by way of an equated monthly instalment (EMI) which is generally fixed for the entire tenure of the loan, one can get higher personal loan eligibility, with longer tenure, as the amount of EMI one can service gets constrained by your disposable income. The tenure of the personal loan is also restrained by your age at the end of the tenure you wish to opt.
As personal loans carry high rate of interest and as the lenders charge prepayment charges in case you prepay the personal loan fully before the original tenure, one has optimise the tenure taking into account various factors. A longer tenure is not necessarily good for each borrower.
For home loans the lenders allow your children, parents and spouse to be co borrowers to enhance your overall eligibility in terms of higher home loan amount but for personal loans the lenders, generally, do not allow any other person to join as co-borrower. So the eligibility for personal loan is fully ascertained on the basis of your own income and you have no scope to enhance it by adding anyone else.
However if the personal loan to be taken is in the nature of marriage loan, the bride and groom are allowed to make a joint application for such loan. So in case of marriage loan making your future life partner as co borrower can help you get higher amount of personal loan if the other person is also earning.