Personal loans are unsecured advances that do not require borrowers to provide any collateral to secure funding. While it provides a borrower the financial freedom to secure funding while keeping all personal and/or business assets safe, the absence of collateral also leaves the financial institution with an increased exposure to lending risk. It thus inclines the weight of entire loan approval on the borrower’s qualification of personal loan eligibility criteria laid down by the lender. The requirements are based on specific factors that impact the borrower’s ability to repay the advance.
Some of these factors have been explored in detail later to help you gauge your ability to repay the advance. Also, we will take a look at a few ways that can help improve your overall eligibility for personal loan. But before that, let’s check out the standard requirements that a lender asks an individual to fulfil when availing a personal loan.
Common Eligibility Criteria for Personal Loans
Some of the common personal loan eligibility requirements that lenders lay down for individuals to fulfil when availing financing include the folllowing.
- Age: For salaried individuals, age must be between 25 and 55 years. In the case of self-employed applicants, age should be from 21 to 60 years.
- Minimum monthly income: Applicant must also be earning a minimum monthly income based on his/her city of residence, starting from Rs.15,000.
- Credit score: Individual credit score must not be less than 700.
- Residential status: Applicant must hold a residing Indian citizenship with a stability of not less than a year.
Personal Loan Eligibility Factors to Check and Improve on Before Applying
The personal loan eligibility of an individual is a stark reflection of his/her financial health and standing. Following factors only re-instate how well one has been able to manage their finances, and allow lender to gauge their lending risk involved.
Fixed obligation to income ratio (FOIR)
Also known as debt to income ratio, it is a parameter than indicates. The total fixed monthly liabilities an individual is servicing as a percentage of the total monthly income. When computing FOIR of an individual, lenders take into consideration the EMIs serviceable for any new loan being availed as well.
The ideal FOIR for the purpose of availing a new loan is under 50%. Meaning all your monthly liabilities combined should not exceed this threshold. If your FOIR exceeds this limit, it is best to either wait until one of the advances is paid off or repay the lowest loan outstanding in a lump sum.
Credit utilisation ratio
It is another crucial financial ratio that an individual must examine to ideally fulfil personal loan eligibility requirements of the lender. The ratio indicates credit dependency of an individual by assessing the percentage of credit utilised out of the total availability every month. Credit utilisation ratio should ideally not cross 30%, exceeding which should indicate excessive credit dependency. You can track your credit usage and limit expenses out of it to bring this ratio down.
Documentation of income sources
While not an eligibility factor in itself, documentation of income sources allows accurate representation of income adequacy of an individual. Income, whereby, is a crucial factor which contributes to loan amount approval as required. Individuals applying for loans often enlist only their primary income sources, which include business profit or salary. Secondary sources of income like rental income, profits from investments. And the likes are often foregone, which can work against one’s borrowing profile.
On the contrary, documenting all income sources allows one to represent. A higher repayment capacity than otherwise, helping secure the needed loan amount with ease.
Existing loan application made in last 6 months
Another factor a little out of primary eligibility for personal loan. Your record of loan applications made in the last 6 years impacts your current loan application as well. Every application that an individual makes sends a hard inquiry on his/her credit history. Which is not considered positive for the purpose of loan approval.
It is thus best to avoid sending multiple loan applications if you are planning to avail a personal loan shortly.
The availability of online personal loans today has simplified the application process for the advance. You must, nevertheless, make sure to check if you fulfil all personal loan eligibility requirements. Or not before applying to improve your chances of approval.