07 OCTOBER, 2022

A personal loan is a great way to cover both emergency and non-emergency expenses. Whether you need to repair your car, have a medical emergency, need to renovate your home, or consolidate your debts, a personal loan can give you the financial help you need. Also, a personal loan requires no collateral or security such as property or gold but it is approved only after you fulfil certain parameters set by lenders.

A lender usually conducts a personal loan eligibility check to evaluate your creditworthiness and determine whether you qualify for a personal loan. This involves assessing your age, credit history, location, employment type, income, etc. And your loan application will only be approved if they find you eligible for the loan.

Here are a few parameters explained in detail that lenders consider when determining your eligibility for a personal loan. 

1. Monthly income

Lenders generally prefer to offer personal loans to applicants with a steady income source. This is because personal loans are unsecured, which means the lender can't seize any collateral if you default on the loan. An adequate monthly income assures the lender of your capability to repay the loan on time.

2. Credit score

Credit score is another important personal loan eligibility criteria that lenders evaluate when considering a loan application. A high credit score shows lenders that you are responsible with finances and are likely to repay your loan on time. Conversely, a low credit score may indicate that you are a high-risk borrower. So, start working on improving your credit score by paying your bills on time, maintaining a good credit history, keeping your debt-to-income ratio low, and adopting smart financial habits.

3. Age

Age helps lenders to evaluate an applicant's earning potential and financial stability. For example, if you are in your early twenties and have just graduated, you may not have the necessary financial stability that lenders are looking for. Similarly, if you are above 60 years or your retirement age is near, your earning potential might decrease. Although the age parameter differs from lender to lender, in most cases, they consider personal loan applications from applicants aged between 21 and 60 years.

4. Employment history

Lenders typically view applicants with a longer work history as more creditworthy than those who have held multiple jobs over a shorter period. Having a steady job demonstrates your ability to repay the loan on time. And if your employer is a reputed firm, then this can further improve your chances of getting approved for an instant personal loan.

Note that the minimum work experience may vary depending on your chosen lender, employment type, and other factors.

5. Debt to income ratio

The debt to income (DTI) ratio is another crucial parameter that lenders assess to understand your ability to repay the loan. To calculate your DTI, lenders simply divide all of your existing loans by your total income. The higher your loan obligations are, the higher your DTI will be, which can lead the lender to charge a higher personal loan interest rate or, in certain cases, reject your loan application.

So, before you apply for personal loan, it is important to understand and work on these five parameters to improve your chances of loan approval.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.