Personal loans can be a quick and easy way to get the money that can be used to fund a home renovation, emergency medical bills, start a business venture or even plan a trip. However, obtaining a personal loan from a bank involves the critical step of verifying the customer, which decides the end result of your application for a loan.
In fact, personal loans are not secured by any guarantees, unlike a mortgage or a car loan, which is the main reason that borrowers would follow strict eligibility criteria before accepting them. Lenders look at your credit score, employment, current EMI, profession, age, and duration of repayment that determines a personal loan application.
Let’s look more carefully at the number of factors banks consider when examining borrowers ‘ personal loan applications:
Important factors are taken into consideration by banks when loaning money to self-employed people and business owners
- Eligibility to repay
- Loan Amount and Repayment Period
A business loan will help you grow your company to new heights of achievement. Banks are usually extra cautious when granting loans to self-employed people or business owners, so you need to share your business plan with the bank and show you have a strong record of running a company.
Banks may refuse to give loans in horrible circumstances (such as high debt), and it becomes crucial to be clear about your loan condition and repayment plan. Banks usually look at the 5 Cs of credit i.e., ability, collateral, money, character, and requirements when reviewing the application for personal loans.
Eligibility to repay:
Before anything else, the Bank will evaluate the repayment ability. The borrower must give the bank a letter while applying for a loan, authorizing them to run your credit history. Banks will analyze with others your repayment history and how much debt you currently have. The bank also checks your profits and determines the payment level for debt facilities. A lender generally requires 1.20 times a total debt-service coverage amount.
Sometimes a bank can request that the borrower have collateral or insurance to cover its risk. Sometimes even the best businesses can see a period of decline due to unexpected conditions that could affect the ability of a company to repay a loan. The amount of collateral a bank may require relies on the available assets such as properties, business assets, pieces of equipment, cars, and deposits in current accounts, FDs, etc.
Borrowers may need to allow the bank to lend to whatever properties you pledge as security after approval of the loan. If you can not repay the loan, then the lien of the creditor can grant it the right to take over and sell your properties and recover its losses.
Banks must analyze and report your financial history, and also determine the capital of your business, which is the amount of money that the business has to deal with. If the bank considers the company is not well-capitalized, the loan application may be rejected as it may consider the same high-risk transaction.
Banks will also verify how much money you have invested in your company, as it indicates how dedicated you are to the growth of your business. In case the bank considers that your personal financial condition is significantly stronger than the business, if you give a personal commitment it could still accept the loan.
The reputation of the Company:
Before accepting the loan application, a lender will also do a thorough check of the background of your business, your credentials and the reputation of your organization. If you and your company have an outstanding credit history, as well as a good reputation and reputable references, the chances of your personal loan acceptance can increase significantly. In the event that your business has a history of debt default or bad reputation, banks can refuse to give you a loan even if you are able to meet the other conditions.
One important thing a bank looks at is the economic climate condition in your industry, which you may not have much influence over. Even if the capability and collateral criteria can be met by your company, but if you work in a high-risk sector, a bank may choose to refuse your loan application. One of the factors behind this is that the market might run the risk of a sudden collapse, endangering the bank’s loan. To guarantee your loan is accepted, you must navigate tough economic conditions and demonstrate the ability to avoid strong experience in managing a competitive company.
In addition to the obvious considerations, banks often recognize the age when considering a loan application. Banks prefer to give loans to people in the 30-50 age group as they are considered financially stable. People in this age group have been employed for a couple of years and have a few years left to easily repay the personal loan. People over 60 may find it challenging to obtain a personal loan and may have to have collateral until banks accept their application for a loan.
Experience is a critical factor that the banks consider. For example, priority will be granted to a person with 15 years of experience over some who are just starting out or who have just 2-3 years of experience. Banks often prefer applicants who have worked in the same sector for a few years before considering the loan application into account. If an individual has a record of rapidly changing careers then a bank may not easily accept their loan.
Loan Amount and Repayment Period:
The repayment period is also taken into account by banks, in addition to the loan amount. Generally they prefer candidates who wish for a shorter repayment period. For, for example, an individual who asks for a 2-3 year loan repayment duration will be given preference over those who have demanded a longer 10 year repayment period, and so on.
Important Factors Considered By Banks Before Lending Money To Salaried Professionals
- Credit Score
- Current Income
- Employment History
- Repayment History
- Amount of Loan
- Purpose of the Loan
- Surplus Income
Credit scores play a major role in determining whether personal loan application should be approved or not. Credit scores were determined on the basis of your debt to credit ratio, and how quickly you repay. The higher your credit score will be, the faster you get your credit payments. The score ranges from 350-900 and it is considered that anything above 700 is pretty good. If you don’t have a good credit score, however, it’s better not to send your personal loan application immediately, but to take steps to improve your credit score.
Banks also look at other aspects, such as your current revenue source and your monthly expenses. Bank officials will also look at how much debt you have before issuing you another loan, like your existing home loan, auto loan, monthly bills, etc.
Loans can check your interest-to-revenue ratio, which is your total monthly debt payments divided by your gross monthly revenue. Ideally, less than 50 percent of your profits should be your total debt.
A record of jobs is also considered as proof of income and security. Lenders require evidence of regular income before loans are approved, so lenders who frequently change their jobs or have no stable source of income are considered risky borrowers. A good job history implies you worked in same profession, and were regularly working. This does not, though, suggest you’ve had to deal with the same business over the years. Self-employed people are usually more subject to scrutiny than wage-earners with steady monthly income.
Occupancy also plays a crucial role in your demand for a loan. Banks may prefer other professions, such as government banks, government employees, and PSU employees. After that, banks prefer people working with blue-chip firms, as well as other stable professionals such as doctors, chartered accountants, engineers, and lawyers.
The lowest preference is usually given to candidates who are self-employed or in a private company. If a person works in a business that has a poor record of paying its workers salaries then the loan application is considered weak. Likewise, an applicant noted for switching jobs also often creates a negative impression.
Banks are also closely looking into the borrower’s credit and debt repayment records. Some unpaid debt can continue to last for up to seven years, thereby impacting both your credit score and your eligibility for loans. If you have a history of poor loan repayment or have unpaid debts then banks may hesitate to approve your application for a personal loan.
Amount of Loan:
The amount of credit which the borrower has applied for is an important factor that banks look into. A larger amount of loans may bring the bank to more attention and it may also ask for leverage to mitigate its risk. On the other side, depending on your arrangement with the bank, a smaller loan proposal could be accepted quickly.
Purpose of the Loan:
The bank will also ask that you reveal personal loan purposess. If it’s a high-risk loan (such as starting a new business with no experience) then banks that refuse your application, charge a higher interest rate or even ask for security. If the loan amount is for low-risk purposes, such as renovations and home repair or building a house, then you can easily get it approved.
Banks must check all of the new EMIs and existing debt you pay off every month. If after paying the EMIs, you have a significant surplus income left over, it will be simpler to get the permission for a personal loan. Low surplus capital conveys that you are now spread beyond your potential and at a higher default risk to the fund. You will recognize the excess balance you have left with each month as well as the ability to make EMI payments when applying for a personal loan.
Eligibility for personal loans is calculated by a number of critical factors. For improve your chances of getting a personal loan at a lower interest rate, you will hold all of the above-mentioned points in mind. In addition to these, banks also consider the length of the applicant’s relationship with their institution. If you’ve maintained a good reputation with your bank and maintained a healthy bank balance, chances of getting your loan accepted would improve. After you obtain the loan, make sure the payments are made on time and your bank can accept it readily the next time you decide to apply for a loan.
If you are searching for a specific small instant with limited documentation and formalities, there are also several alternatives to banks. PaySense is a financial lender providing personal online loans up to Rs 5,00,000 with no collateral or high credit score.
If you are a self-employed person, you must receive a total of Rs. 15,000 and if you are a salaried employee, you must earn Rs. 12,000 a month. Furthermore, as well as being between 21 years and 60 years old, you must be a citizen and resident of India and have an active bank account.
PaySense provides its services in more than 40 Indian cities and also helps its customers to pick their own repayment schedule. But, the best part is that you can apply for a loan using the free PaySense software and get your loan application approved on the same day itself! Get the PaySense download from Google Play Store now to learn more about PaySense’s personal loans and decide your credit line.