There are a lot of misconceptions about personal loans that are floating around. For starters, people believe that personal loans are expensive and shouldn't be availed when it's possible to borrow money from friends and family. Others think that they are nothing but a Ponzi scheme run by the banks to take advantage of the common man. However, there is no truth to these statements.
Personal loans are a great option to pick when you have to meet urgent cash requirements such as medical emergencies, home renovation, etc. They are completely safe and easily affordable too. However, the catch is that you should have a high credit score. This brings us to the subject at hand, which is "how do banks evaluate personal loan eligibility?"
Whether you want an HDFC personal loan or Axis personal loan, all lenders consider the same factors when assessing your loan application. These are:
Your credit history plays the biggest role in the loan eligibility process. This is because it offers a deep insight into your creditworthiness, i.e. how good you are with credit repayment.
A bank learns about your credit history through a standard credit report which is offered by the credit rating agencies. These include CIBIL, High Mark, Experian, etc.
If you are interested in going through your credit history (which is strongly recommended for becoming "credit smart"), then you can apply for the report from any top credit rating agency by visiting their website and completing a simple process. In fact, for the first report, you don’t even have to pay anything as it's free as per the RBI regulations.
The following are some of the most important components of your credit report that the creditors take into account:
Remember- it's rare to get personal loans without CIBIL check. So, be sure to monitor your CIBIL report regularly and take measures to keep the score high.
If your credit profile appears trustworthy, then the next thing the bank wants to know is whether your income is high enough for you to repay the loan successfully.
Basically, the creditor checks the nature of your income. If you a salaried professional, then they want to check whether you have switched jobs frequently in the recent past or you like to work in the same company for a long period. Similarly, if you are an entrepreneur, then they want to know what kind of business you are into and what your profits have been like in the past 3-4 years.
Banks don’t approve personal loans without CIBIL check and income check. However, they also take into account your current outstanding debt if there is any. This is because even if you have a satisfactory credit repayment history and a stable income, you can't repay a loan if you are already in huge debt.
It all boils down to this- if you want to be eligible for a personal loan at an affordable interest rate, then your credit profile should be strong and convincing, you should have a high income or at least enough that justifies the loan EMIs, and lastly- next to no existing debt. That’s the key to getting a personal loan of your choice. Good luck!