Personal Loan Eligibility: What Is It, How It's Calculated and How to Improve It
As a personal loan is an unsecured credit option, lenders have standard eligibility criteria based on which they determine the borrower's creditworthiness and disburse the loan amount accordingly
Personal loans are a one-stop solution to all financial needs of an individual. It bestows borrowers with a faster approval process, zero collateral requirement and no-end use restrictions. In addition, borrowers can use the loan principal to fund higher education, manage unforeseen medical exigencies, renovate homes etc.
However, to receive approval for an instant loan, borrowers must adhere to the eligibility norms set by lenders. As a personal loan is an unsecured credit option, lenders have standard eligibility criteria based on which they determine the borrower's creditworthiness and disburse the loan amount accordingly.
Know the Eligibility Criteria for a Personal Loan
It is imperative for borrowers to meet the eligibility criteria set by lenders to receive quick approval for the loan amount. Here are the common eligibility parameters:
- Applicants must be residing Indians
- Individuals must have stable income status at a public/private company
- He or she must fall in the age bracket of 21 and above
- Individuals must have a CIBIL score of 750 or above
Besides meeting the eligibility norms, borrowers must keep the necessary documents handy.
Know How Personal Loan Eligibility is Calculated
Different lenders resort to different ways to compute personal loan eligibility. It is very important for borrowers to check their eligibility as it helps them find the right lender and know the amount they qualify to borrow. The loan eligibility is calculated depending on borrower’s fixed obligation to their monthly income status.
Lenders use the FOIR (Fixed Obligations to Income Ratio) method to determine a borrower's repayment potential. Borrowers' fixed financial obligations are taken into consideration, and then it is deducted from their disposable income.
Here is the formula that lender uses for computing FOIR:
FOIR = (Sum of Existing Obligations/Net Take Home Monthly Salary) * 100
Through this method, even borrowers can evaluate the amount they can afford as the EMI pay-outs.
Another way to evaluate a borrower's eligibility is the Net Monthly Income method (NMI). Lenders determine the maximum loan amount by using a multiplier depending on the net monthly income of borrowers. In this way, borrowers can receive a loan principal of up to 30 times their net monthly income. If the loan limit exceeds the mentioned limit, the borrower's loan application will receive approval.
Know How to Improve Personal Loan Eligibility
Borrowers can improve their personal loan eligibility in the following ways:
- Ensure a healthy credit score
The most effective way to improve personal loan eligibility is by ensuring a healthy credit score. A credit score reflects a borrower's repayment record and financial behaviour. Hence, keeping a higher credit score of 750 and above will help borrowers receive quick loan approval. Furthermore, it will help borrowers secure affordable loan terms. Borrowers must repay loan amount on time, limit credit utilisation, etc. to improve their credit score.
- Mention alternate sources of income
Besides ensuring a stable income status, borrowers must reveal their additional source of earnings like rental income, part-time jobs etc., as it significantly increases their personal loan eligibility. An alternate source of income assures lenders of borrowers' repayment capacity, and hence they are likely to approve the loan amount.
- Avoid taking multiple loans
Borrowers must refrain from taking multiple loans as it projects them desperate for credit and put their repayment potential into question. In addition, lenders consider them credit-risk individuals, hampering the chances of getting instant loan approval. Servicing multiple loan will make lenders believe that the applicants income will not suffice and this will lead to default on repayments.
Instead, borrowers must clear their existing dents and credit card bills to enhance their eligibility. In this regard, one must use a personal loan eligibility calculator and evaluate their needs before applying for a loan.
- Be mindful of the debt-to-income ratio
Borrowers should not spend more than 40% of their disposable income on repaying the EMI payment. Borrowers must try to keep the debt-to-income ratio at a minimum. Borrowers will not receive approval for the loan amount if lenders doubt their repayment capacity. Borrowers must try to bring down the debt-to-income ratio. Hence, they must pay off current debts as it depletes cash flow. Borrowers have a higher chance of qualifying for loans if they have fewer debts.
- Include a co-applicant
Applying for a personal loan with a co-applicant improves personal loan eligibility as lenders scrutinise the income status and credit score of both applicants. In addition, the repayment burden gets divided between the two applicants; hence lenders get assurance regarding the timely repayment of the EMI amount.
- Choose the lender carefully
Borrowers must choose the lender carefully. It is essential to compare different lenders and their offerings. They must settle for a lender that extends easy-to-meet eligibility criteria. Also, borrowers must avoid changing their jobs frequently as lenders evaluate borrowers' income stability and employment history. Frequent job change shows career instability, which puts lenders at risk and hence lenders are less likely to approve loan applications.
- Check the list of necessary documents
Another important parameter that borrowers must ensure to check to receive quick loan approval is the list of documents that they have to submit while applying for the credit option. Any discrepancy in the documents will lead to rejection of the loan application. Here are the following documents that borrowers must submit to qualify for the loan amount.
- KYC papers
- latest bank account statements
- Salary slips
- Employee ID card
- Income tax returns (for self-employed applicant)
- Previous year’s turnover (for self-employed applicant) etc.
Furthermore, borrowers must avoid over borrowing. Borrowers must list their financial needs and then decide on a loan amount. Opting for a higher amount will put their repayment capacity into questions. Lenders can consider them as high credit-risk individuals and cancel loan applications. Hence, to improve personal loan eligibility, borrowers should be mindful in choosing the right loan amount.
To sum up, availing of an instant personal loan is one of the effective ways to mitigate monetary urgencies. It does not require individuals to pledge their property as collateral, helping one avail instant loan. Lenders set the eligibility norms surrounding the borrower's credit score, income status etc. It allows lenders to ascertain borrowers' repayment capacity. Hence, borrowers must abide by them.
Disclaimer: This article is a paid publication and does not have journalistic/editorial involvement of Hindustan Times. Hindustan Times does not endorse/subscribe to the content(s) of the article/advertisement and/or view(s) expressed herein. Hindustan Times shall not in any manner, be responsible and/or liable in any manner whatsoever for all that is stated in the article and/or also with regard to the view(s), opinion(s), announcement(s), declaration(s), affirmation(s) etc., stated/featured in the same.