One of the most popular types of loans on the market today is the personal loan. Personal loans are useful when there are planned or unexpected expenses like vacations, weddings, or medical emergencies that are beyond your financial capabilities.
People need money for too many reasons – especially with Covid-19 which has brought the economy to a virtual standstill and in turn damaged the lives of many people. This explains why in India, 77% of working people rely on personal loans to make ends meet. Taking out a personal loan is considered a great option if you can comfortably make the repayments over the term of the loan.
That said, to qualify for a personal loan, you must meet the eligibility requirements set by the lender. In this article, we are going to learn all about personal loan eligibility and how you can improve your chances of getting a personal loan.
What makes personal loans ideal?
Before we look at personal loan eligibility and the criteria you need to meet to get your personal loan application approved, let’s understand why personal loan has become famous and has become a preferred option for many.
One of the main reasons why personal loans are chosen is that they are unsecured loans. Unlike home loans or car loans, borrowers do not need to provide any form of security or collateral to the lender to qualify for the loan. As no collateral is required, the documentation required to apply for the personal loan is much less compared to any other type of loan.
Another key reason people opt for a personal loan is that once the borrower has been approved for a personal loan, they can use the fund for any purpose they see fit. Lenders do not restrict or limit the end use of funds secured by a personal loan. Whether it’s paying off long-standing debts, down payments on a car or house, unpaid credit card bills, or financing a reception or home renovation, there are a plethora of expenses that can be financed with a personal loan.
Finally, personal loan interest rates are fixed, they do not vary from time to time like credit card interest rates. This way, not only will you pay a fixed amount each month, but you can also easily track your payments.
The Indian working class bears a great responsibility and in most cases struggles to survive on their monthly salary, which is just enough to meet their daily expenses.
Struggling to meet their needs and without additional savings, they struggle to meet each time an unexpected cost arises. In such cases, when they are unable to get a personal loan from the bank, they have no choice but to go to lenders who charge high interest rates and impose unfavorable loan conditions.
Personal Loan Eligibility Explained
When you need a specific amount or are short on funds, you can approach a financial entity to apply for a personal loan. Although you can easily apply for personal loans online, for the loan amount to be sanctioned, you must meet a set of eligibility criteria. According to certain general limits and requirements, the personal loan criteria will be different from one lender to another.
Here are some of the basic criteria you need to meet:
- You must be between 18 and 60 years old.
- You should be an Indian citizen.
- You must have a professional experience of at least 12 months.
- You must have worked with your current employer for at least 6 months.
- You should have a monthly salary of INR 15,000 or more.
In addition to this, along with a completed application form, you must also be able to provide the below mentioned documents to the lender:
- A recent passport size photograph.
- Salary slips and proof of income.
- Proof of Address like Driving License, Aadhar Card, Voter ID, Passport.
- Proof of identity such as PAN card, Aadhar card or government ID for people employed by the government.
It’s also imperative to regularly check your credit score (a three-digit number ranging from 300 to 900, which indicates your creditworthiness) to ensure that you qualify for a personal loan.
How to improve your chances of getting a personal loan
Banks and financial institutions look at a range of factors to determine a borrower’s creditworthiness.
Here are 10 tips that will increase your chances of qualifying for a personal loan.
1. Check the lender’s eligibility criteria
Before selecting a lender, make sure to go through all their requirements. This will help you avoid the accident of rejection for trivial reasons like age or income.
2. Track your Fixed Obligation to Income (FOIR) ratio
When you end up using a high percentage of your income to pay off existing debts, it reduces your creditworthiness for getting new loans. This could reduce your chances of getting approved for a loan or worse, lenders may even charge you a high interest rate to cover the additional risk.
Always make sure you maintain a 40% to 50% FOIR. To increase your chances, you can consider paying off your debts and credit card bills.
3. Apply for the right loan amount
For your loan application to be approved, you must apply for the correct amount. Before applying for a loan, use a personal loan eligibility calculator to check how much you qualify for based on the income you earn, your current debts and other factors.
4. Avoid applying for too many loans at once
When a borrower needs emergency funds, they may end up applying for a loan from multiple lenders to increase their chances of getting their loan approved.
While this might give them hope of getting approval from at least a few of the lenders, it’s definitely not the best way to go. Every loan application leads to a thorough investigation of your credit report, which will ultimately lower your credit score.
5. Improve your credit score
This brings us to our next point on improving your credit score. Lenders pay a lot of attention to your credit score when scanning your loan application. As mentioned earlier, as part of the eligibility criteria for a personal loan, you must ensure that you have a good credit rating. A score of 750 or more is considered a good score.
The weaker the credit, the less likely you are to get a good deal on your loan application. Some of the best ways to improve and maintain a good credit score include: paying your EMIs and credit card bills on time, diversifying your credit portfolio, and lowering your DTI and credit utilization rate.
6. Add your spouse or parents as co-borrowers
In most cases, you have the option of including your spouse or parent as a co-applicant. This especially helps when your credit profile is not satisfactory or up to par. If your co-applicant’s income and credit rating are high, including them will increase your chances of getting a loan, as it will increase your repayment capabilities and earn you a personal loan at a nominal rate.
7. Choose your lender carefully
Before settling for one lender, it is best to thoroughly research all the options available in the market. Although there may be an urgent need for funds, avoid settling for the first lender you encounter.
In recent times, a wide range of financial players have flooded the market with favorable loan conditions. Do a thorough check to make sure you don’t miss out on available offers.
8. Be sure to mention all your sources of income
When you apply for a personal loan, you must prove that you are able to repay the loan amount. So, instead of just providing details of your basic income, be sure to provide information about any additional income you earn, such as rent. This will not only increase your chances of getting a sanctioned loan, but you will also qualify for a higher loan amount.
9. Opt for a longer loan term
When you choose a longer loan term, it will help you break down your EMIs into smaller installments and reduce the financial burden on you to make timely repayments. This will not only reduce your FOIR, but also increase your chances of getting approved by lenders.
10. Ask about prepayment of the loan
In most cases, borrowers are allowed to prepay their loans. Although you can opt for a longer term, it is good to always check if there is an option to prepay your loan amount. There are a few fees to be able to opt for prepayment of a loan but it will save you the high interest rate you would otherwise have to bear.
These tips will help you improve your eligibility and therefore increase your chances of getting a sanctioned personal loan. Choosing the right lender is crucial to ensure a stress-free and seamless experience from the loan application stage to loan approval and then receipt of funds.