Here’s how lenders determine an applicant’s personal loan eligibility

Personal loans have become a popular way to finance almost everything – from home improvement projects to debt consolidation and various other planned and unplanned expenses. With an easy application process, minimal documentation, no collateral requirement, and instant approvals, availing a personal loan requires just a few simple clicks.

But just like other types of loans, a personal loan also requires applicants to meet some eligibility criteria set by lenders based on which an application can be delayed or denied. The purpose of this criteria is to determine your ability to repay the loan. While the personal loan eligibility criteria vary between lenders, here’s a closer look at a few factors most lenders consider when assessing your loan application.

  • Stability of your job

Since personal loans are unsecured, lenders can’t seize any collateral in case you default on your Equated Monthly Instalment (EMI) payments. So, they will often check your employment stability to evaluate your repayment capacity. This involves looking at both your work experience and your current employment status.

Your loan application may be quickly approved if you are a stable borrower with a regular income through salary as an employee or have a business. And if you have a history of frequent job changes, it may be difficult to convince a lender that you have the financial stability necessary to make loan payments on time.

  • Credit history

Another crucial factor that affects your personal loan eligibility is your credit history. Your credit history is a record of your past repayment behaviour, and it shows lenders if you have been punctual and regular with your payments.

If you have a history of defaulting on loans or making late payments, your credit score is likely to be lower, and you may find it more difficult to get approved for a loan. However, if you have a good credit history, you may qualify for a competitive personal loan interest rate. Thus, it is important to start improving your credit score by paying your bills timely, maintaining a low debt-to-income ratio, and adopting other smart financial habits.

  • Age

When you apply for a personal loan, most lenders consider your age to understand your earning potential and financial stability. They want to ensure that you have adequate working years remaining to repay the loan. Different lenders may have different age requirements, but most lenders consider applicants between the ages of 21 and 58 suitable for personal loans.

  • Debt to income ratio

Lenders also look at your income and debt-to-income ratio when deciding whether to approve your application. Your debt-to-income ratio is your monthly debt obligation divided by your monthly income. Lenders typically won’t approve applications from applicants who already have high levels of debt obligations each month. Thus, it is recommended to keep debt-to-income ratios below 50% to get approved for an instant personal loan.

Thus, lenders look at your income, credit score, occupation, ongoing EMIs, age, and repayment history while evaluating your personal loan application. Besides these factors, your relationship with the lender counts too. If you have a long-standing good relationship with your lender, you may even qualify for an instant personal loan, especially if you have a clean record.

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