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Minimal paperwork, quicker disbursal, absence of collateral and zero curbs on end use of loan proceeds make personal loans a preferred option for those requiring quick loan disbursals. However, the absence of collateral in such loans raises credit risk for the lenders, thereby leading them to exercise a more stringent loan-evaluation process. Here are factors lenders mull while considering loan applications:
Credit score
Banks and NBFCs use credit score as one of the first filters for assessing personal-loan applications. Applicants with a credit score of 700 and above are considered as more financially disciplined and thus, reduce the credit risk for the lenders. This raises the chances of getting personal-loan applications approved. Lower credit risk also leads many lenders to offer personal loans at lower interest rates. On the contrary, applications by those with lower credit scores are either rejected or approved at higher interest rates to compensate for the higher credit risk.
As the need for a personal loan can arise anytime, it is crucial to work towards a higher credit score for credit readiness. Following healthy credit practices such as repaying EMIs by due dates, avoiding multiple loan/credit card applications within a short span of time, monitoring loans guaranteed/co-signed by you, etc. would help improve credit score.
Also fetch and review credit report at regular intervals. This will allow you to take corrective measures for improving credit score and help identify clerical errors or incorrect information, if any, in the credit reports and then, report to the credit bureaus for correction. A rectified credit report will automatically improve credit score and the chances of your personal loan approval.
Repayment capacity
Lenders usually prefer individuals whose total monthly repayment obligations, including the EMI of the proposed loan, are within 50-55 per cent of the monthly income. Those exceeding this threshold usually have lower chances of personal loan approval. As longer tenures lead to lower EMIs, applicants exceeding the 50-55 per cent limit should select longer tenures to cut monthly EMIs and improve the chances of loan approval. While selecting optimal EMI and loan tenures, applicants must also factor in monthly contributions towards crucial financial goals. Ignoring these for higher EMIs may adversely hit long-term financial health.
Occupation profile
Many lenders consider the employment profile of loan applicants while evaluating loan applications. For example, lenders usually prefer salaried over non-salaried staff because of the higher income certainty associated with the former. Among the salaried applicants, those employed with public sector or reputed private sector corporates are usually preferred over others. Many lenders also maintain a list of approved employers for granting loan approvals. Such lenders may reject the loan application of those whose employers or occupation profiles are not included in the list of approved staff/occupation. Among the non-salaried individuals, professionals like doctors and chartered accountants have higher chances of securing loan approvals. With lenders increasingly adopting risk-based pricing methods for setting the interest rates of loan applicants, many lenders are also factoring in the employer/occupation profiles of applicants.
Job stability
Lenders also consider job stability of salaried applicants while evaluating the loan applicants. Many lenders also require them to have a total work experience of at least 1 year while a few require longer tenures for availing the loans. Also, some lenders require loan applicants to have worked for a pre-determined period in the current organisation. Thus, individuals planning to apply for a personal loan should try to avoid job switches till loan disbursal.
Banking relationship
Many banks prefer lending to existing customers, especially those having good credit profiles and/or those maintaining significant deposits or investments with the banks. Some banks also offer pre-approved personal loans to existing customers, at preferential interest rates. Thus, existing customers planning to avail the loan, should first contact the respective bank or NBFC with whom they maintain deposits and/or have availed loans.
They can also use the loan features offered by such lenders as a benchmark for comparing the loan offers provided by other banks and NBFCs.
(The writer is Chief Business Officer of Unsecured Loans, Paisabazaar)
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