A personal loan is an unsecured loan that can be availed without any collateral or guarantor to help you fulfill your financial needs, it also gives you the flexibility to use the loan amount the way you want to use it. It generally charges a high-interest rate than other loan types because of the risk involved with the personal loan.
Factors Considered By Banks Before Lending Money:
Credit Score of the individual A credit score is from 300 to 900, it tells the financial status and the repayment capacity of the individual, it tells the credit history of the person. Banks consider a credit score of 750 or above appropriates to give loans to the individual.
Current Income of the individual Banks also look at the current source of income and your monthly expenses. Bank managers will also look at how much debt owe, which includes your existing monthly bill, home loan, auto loan, etc before lending you another loan. Lending institutions will check your debt to income ratio, which should be less than 50% of your income.
Employment History of the individual The employment history of the individual is also taken into account as income source proof and stability of the financial condition of the person before approving loans. Applicants changing their jobs frequently or not having a stable source of income are termed as risky borrowers that is why self-employed people often undergo more scrutiny than salaried people with stable monthly salary.
Occupation of the individual There are some occupations that lenders prefer, like government employees, government banks, and PSU employees, that makes the occupation of the individual
important for loan application. Banks also prefer people working with well known and stable companies, as well as other stable professionals like engineers, lawyers, doctors, and chartered accountants.Self-employed applicants or applicants in a private company usually get the least priority. An applicant who is known for changing jobs frequently also creates a bad impression. However, lenders treat all applications equally, no matter where it is from.
Repayment History Lending institutions also look closely at the credit history and loan repayment history of the applicant. If you have a poor loan repayment history or have any unpaid debts then banks may not approve your loan application.
Amount of Loan A higher loan amount leads to greater scrutiny by the bank, that is why the amount of loan is considered important by the lenders and they may ask for collateral to hedge its risk as well. A smaller loan application could be quickly approved based on your relationship with the bank. Banks will also consider your repayment capability, financial history, etc. before approving your loan amount.
Purpose of the Loan The purpose of the loan is also asked by the bank and if it is a high-risk loan (like a start-up) then banks may reject your loan application, or charge you a higher interest rate or even can ask for collateral. Loans for low-risk purposes may get approved easily.
Surplus Income Banks will check all your ongoing EMIs and existing debt that you are paying off each month. In case, you have a considerable surplus income left over after paying your EMIs, getting the approval for a personal loan will be easier. Low surplus money conveys to the bank that you are already stretched beyond your capacity and are at a higher risk of default. While applying for a personal loan you must consider the surplus amount you have left with each month as well as your ability to make EMI payments.
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