How Do Lenders Decide on Personal Loan Eligibility?

When lenders decide whether to approve a personal loan and under what conditions, they look at various factors such as your credit score, income, ability to repay, age, occupation, employer's profile, and more. Based on these factors, lenders determine:

• The interest rate to offer
• Whether to approve the loan
• How much of the loan amount to sanction

While the specific criteria for personal loan eligibility may differ among lenders, they generally consider these common factors during their assessment.

Factors that help lenders decide personal loan eligibility

Age of the Applicant

The minimum age required to apply for a personal loan is 18 years, while the maximum age is 65 years. Some public sector banks extend personal loans to pensioners based on their pension income, providing financial assistance even after retirement.

Minimum Income

Lenders favor applicants with higher incomes for personal loans because a higher income suggests a greater capacity to repay the loan, reducing the risk for the lenders. For salaried professionals, many lenders require a minimum salary of Rs. 15,000 or higher. However, income requirements can vary among lenders and locations. For self-employed individuals, banks and NBFCs usually look for a gross annual income of Rs. 2 lakh or more to qualify for a personal loan.

Loan Repayment Capacity

Lenders also consider your repayment capacity when assessing personal loan eligibility to ensure you can easily manage loan EMIs by their due dates. To gauge this, lenders often use metrics like the EMI/NMI ratio, also known as FOIR. This ratio represents the proportion of your monthly income used for paying fixed monthly obligations. Typically, lenders look for an EMI/NMI ratio of less than 50% to 55%. This means that your credit card and existing loan EMI obligations, including those of the proposed loan, should not exceed 50% of your total income. Applicants exceeding this limit may have lower chances of personal loan approval.

Employment Type and Employer Reputation

Lenders provide personal loans to both salaried and self-employed individuals. However, they often offer loans to salaried applicants at lower interest rates because of the certainty of their regular income. This lowers the risk for lenders, as it assures them of timely repayment. Additionally, lenders consider the employer's profile. They prefer lending to government employees, employees of reputed corporations, and multinational companies (MNCs) among salaried applicants. For self-employed individuals, professionals like doctors, chartered accountants (CAs), architects, etc., have a better chance of getting personal loans at lower interest rates.

Work/Business Experience

Lenders also consider job or business stability when approving a personal loan. Generally, lenders require salaried borrowers to have at least 2 years of total working experience, with at least 6 months in their current organization, to qualify for a personal loan. For self-employed individuals, their business should have been running for at least 2 years to be eligible for a personal loan.

Minimum Income

Lenders prioritize applicants with higher income for personal loans because it indicates a stronger ability to repay the loan, reducing the risk for lenders. For salaried professionals, most lenders require a minimum salary of Rs. 15,000 or more. However, income requirements can vary depending on the lender and location. For self-employed individuals, banks and NBFCs usually look for a gross annual income of Rs. 2 lakh or higher to qualify for a personal loan.

Credit score

Your credit score shows how well you handled your loans and credit card payments before. People who are responsible with credit, like paying their credit card bills and loan payments on time and in full, usually have high credit scores. Because of this, lenders like to give personal loans to applicants who have credit scores of 750 or more. If you have a high credit score, you're more likely to get lower interest rates on personal loans, and you might even get offers for instant personal loans or pre-approved loans from your lenders, as long as you meet their other requirements.

Tips to Increase Personal Loan Eligibility

1. Adding a co-applicant, such as your spouse, parents, or children, to your personal loan application can improve your eligibility. When you apply with a co-applicant, lenders consider the credit scores and repayment capacity of all applicants. However, it's important to note that not all lenders allow co-borrowers for personal loans.
2. It's important to check your credit score regularly, especially before applying for a personal loan. This allows you to see if your score is low and take steps to improve it before applying. Regularly reviewing your credit report is also essential to catch any errors or inaccuracies that could negatively impact your credit score and reduce your chances of getting approved for a personal loan.
3. Lenders also look at your employment history and stability when deciding if you're eligible for a personal loan. If you change jobs often, lenders might be hesitant to give you a personal loan. This is because switching jobs a lot can show that your career isn't stable, which makes you more of a risk for lenders. So, it's a good idea to try to avoid changing jobs frequently, especially if you're thinking about applying for a personal loan soon.