The importance for personal loan can never be denied as it is a big rescuer for people who are in urgent need of money. But on the other hand, it is the most risky decision for the bank when approving this loan type. The biggest advantage of personal loan is that it is the only loan that gets approved fast and that too with no collateral and guarantor required. There are many lenders or finance companies who approve the personal loan application within 5 minutes, when applied online. They do this in order to make profits out of interest earned and at the same time get new customers so that they can cross-sell other products.
Uses of Personal Loan:
Personal loan is normally used for following purposes:
- Consolidating any type of debt such as settling your credit card bill
- Medical emergency
- Buying home appliances such as air conditioner, refrigerator and many others
- Starting business
However, not everyone gets personal loan approved fast. This is because lenders do a thorough background check of the applicant by checking most importantly the CIBIL score along with the following eligibility criteria:
- Salary or Turnover: Your income plays a very important role in approval. Based on this single factor, lenders take a decision on whether to approve loan or not. Every financer has a minimum salary requirement for both salaried and self employed in order to evaluate the repayment capacity. Any individual not meeting this limit will be straight away denied the loan. Same applies to businessman and for them there is a minimum turnover requirement. Based on this factor, your interest rate and loan amount is calculated. Higher the income, higher would be the loan amount approved and possibly lower would be the annual interest rate.
- Credit Score: There is a direct relation between credit score and personal loan approval. Higher the CIBIL score, higher are the chances of faster loan sanction. However a low CIBIL score straighaway results in loan application rejection. A poor score is a result of payment default or frequent late payments, overcrossing the credit limit, too many loans or credit card already in use. Check out how to get CIBIL score.
- Age: This again varies for each lender. But almost every bank offers personal loan to individual’s who are minimum 22 years of age. So a college goer seeking a loan for bike purchase will be straight away denied the loan. This is because banks have no way to evaluate the repayment capacity of the student. However if a student has a bank account with the applied bank with regular transactions and higher deposit amount then he/she can take personal loan against fixed deposit. And there is a chance that interest rate offered would be on a lower side compared to the standard market rate.
- Occupation: Another eligibility criteria for salaried individual is the occupation or nature of the job. Full time working professionals are more likely to get personal loan than part-timers or freelancers. This is because, regular income is not always possible in case of part-time professionals or freelancers due to the nature of their job. So there is always a risk for the bank in providing loan as such individual can default on the payment which directly impacts the profit of the lender. With rising cases of NPAs every year, banks have now become very stringent in granting any type of loan.
- Years worked or stability of the job: If a person is frequently switching the companies then it creates a doubt for the financing lender and there is a higher possibility of the loan application getting rejected. Also, if you have just joined your first job and apply for the loan, then likelihood of loan getting approved goes down.
- Company/type of business of the applicant: You may not believe but banks give preference to individuals working in publicly listed companies, MNCs. And those working in small organizations have to prove their eligibility with the above mentioned criteria.
- Profit after tax: This is for businessman applying for a loan and every bank has minimum limit set. For e.g. ICICI bank has a limit of Rs. 2, 00, 000 for self employed and Rs. 1, 00, 000 for other professionals. Banks consider this factor to judge the borrower’s repayment capacity. Loss making companies are more likely to default on the payment and banks will deny such applications.
- Business stability: An establishment who is in business for a longer duration is more likely to get approval then the one who is just 1 or 2 years old.
So making an informed decision before taking a personal loan is a key to a better financial future. Key points to be considered – whether loan is really required or not and will you be able to make timely payments or not. In addition to this choose a company offering loan at low interest rate.