Key factors that can a ect a personal loan proposal
The absence of collateral in personal loans increases the credit risk for lenders, thereby leading them to exercise a more stringent loan-evaluation process
inimal 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:
Applicants with a credit score of 700 and above are considered as more nancially disciplined thereby reducing the level of credit risk for the lenders
Lenders usually prefer salaried employees over non-salaried employees because of the higher income certainty associated with those drawing a salary
MCredit score
Banks and NBFCs use credit score as one of the rst lters for assessing personal-loan applications. Applicants with a credit score of 700 and above are considered as more nancially 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 oer 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/cosigned 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 rectied 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% 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% 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 nancial goals. Ignoring these for higher EMIs may adversely hit long-term nancial health.
Occupation prole
Many lenders consider the employment prole of loan applicants while evaluating loan applications. For example, lenders usually prefer salaried over non-salaried sta 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 proles are not included in the list of approved sta/occupation. Among the non-salaried individuals, professionals like doctors and chartered accountants have higher chances of securing loan approvals. With lenders increasingly adopting riskbased pricing methods for setting the interest rates of loan applicants, many lenders are also factoring in the employer/occupation proles 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 proles and/or those maintaining signicant deposits or investments with the banks. Some banks also oer pre-approved personal loans to existing customers, at preferential interest rates. Thus, existing customers planning to avail the loan, should rst contact the respective bank or NBFC with whom they maintain deposits and/or have availed loans.
They can also use the loan features oered by such lenders as a benchmark for comparing the loan oers provided by other banks and NBFCs.
(The writer is Chief Business Ocer of Unsecured Loans, Paisabazaar)