No matter how well-prepared an individual is for life, there are moments when they might find themselves in tight spots. A financial crisis may arrive at any time, leaving everyone troubled and worried. Thankfully, an instant Personal Loan exists as a simple and easy way to fund various requirements without thinking about the budget. However, NBFCs consider several factors in determining an applicant’s eligibility to get approval.
When an individual applies for a Personal Loan, they want to maximise their chances of getting approved. After all, when they need the funds, nothing can be more frustrating than a loan rejection. Understanding the key factors affecting personal loan eligibility is essential to ensure that a surprise denial does not disappoint the applicant. Here’s a closer look at the five most important factors that impact the likelihood of getting a Personal Loan.
Lending institutions want to avoid lending loans to people who cannot pay them back on time. So, when applicants apply for a Personal Loan, lending institutions are naturally concerned about their income and earnings.
For instance, if an individual applies for a loan with ₹ 15,000 EMI amount, but their monthly income is just ₹ 20,000, it is a major red flag to lending institutions that they will struggle to repay. However, if an applicant’s EMI is ₹ 5,000 per month and their income is ₹ 20,000, they stand a much better chance of getting immediate loan approval. That is because the EMI payments consume a very small percentage of the applicant’s earnings.
Employment is the income source for salaried professionals. Many reputable NBFCs provide Personal Loans to salaried professionals only considering their income and job stability. When they receive a loan application, lending institutions want to confirm that they have a steady work situation and a minimal chance of losing their job, which leads to a loss of income and a financial crisis at any moment. Lending institutions get an idea of an applicant’s job stability by looking at their recent employment history. Those who have been in the same job for a few months are likelier to continue working with the company. Conversely, if they have recently joined a new job with a salary hike, NBFCs may need to find more reliability in this income.
While evaluating the income amount to repay the loan, lending institutions often consider the applicant’s income for the past 1-2 years. For instance, if an applicant has been earning ₹ 50,000 for the past 3-4 years but got a hike to ₹ 75,000 a few weeks before the loan application, they will likely evaluate the loan application while considering ₹ 50,000 as the stable income. Considering this lower income will help determine if they qualify for a loan and how much they may borrow.
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Current Financial Obligations
It’s not just the income that affects an individual’s chances of repaying the loan. Their current financial obligations also make a significant impact. Those already in debt may have poor chances of getting another loan from lending institutions. After all, if an individual already owes a fortune, even a minor drop in their income can leave them struggling to meet their current financial obligations.
Lending institutions compare an applicant’s monthly debt payments to their monthly income to evaluate their likelihood of repaying the loan. This ratio is termed the DTI ratio or debt-to-income ratio. Various instant Personal Loan providers have different maximum DTI requirements. However, ideally, a DTI ratio not exceeding 30-40% is good to grab a loan. Those who exceed this limit often get a denial for their loan applications.
Recent Loan Applications
Another red flag comes when a loan seeker submits several credit applications within a short period. If an individual needs urgent funds, they may suddenly go on a borrowing spree and apply for loans from various NBFCs, hoping to get approval from at least a few. However, this is a bad strategy that makes financial institutions very concerned about the applicant’s repayment capacity. Such behaviour projects the applicant as a credit-hungry borrower. Lending institutions believe that the financial balance is getting over their head, and they are likely to default in the future.
NBFCs refer to each applicant’s credit report to see how much credit they are already handling and how many new loan applications they have made recently. Each loan application pulls a hard enquiry on the credit report, reducing the credit score by a few points. That means each time a person requests credit, it leaves a hard enquiry that stays in the report for around two years. If a person has ten hard enquiries because they applied for loans from ten different loans, lending institutions become wary of lending to them.
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The applicant’s credit score is crucial in getting a Personal Loan approval. It helps lending institutions understand an individual’s track record of repayments and their experience in debt management. So, the credit score largely depends on how a person previously managed credit. As a general rule of thumb, the higher the credit score, the better the chances of getting easy loan approval. Those with a clean credit history devoid of any defaults are preferable borrowers to lending institutions.
Understanding these crucial factors affecting the NBFC’s lending decisions puts a loan seeker in a better situation for instant Personal Loan approval. Those with a 630+ credit score, stable income and employment, and low DTI ratio will maximise their chances of not just getting a loan approval from top NBFCs but also attracting lower interest rates and better terms and conditions.