The need for money can tap on anyone’s door at any time. When you can’t satisfy it with your available income, personal loans are a great backup plan. Personal loans are unsecured loans offered by financial institutions to individuals having a salary and business income. There is no restriction on the end use of a personal loan.
You can buy kitchen appliances, gadgets, and cars, use for marriage expenses, higher education, and meet medical emergencies. With the plethora of options available, it may seem that getting a personal loan is quite easy. But the lenders have their eligibility requirements to qualify for a personal loan.
The following snapshot explains salient points about personal loans. The factors presented here represent the general lending practice followed by the lenders and it can vary from time to time on a case-to-case basis. We suggest reading through the product brochure of the lenders before making any decision.
| 1. | Basic Eligibility | The loan applicant must be a resident Indian of age between 21 years and 65 years. Some banks ask for a minimum age of 23 years.
The minimum net monthly income shall be Rs 15,000 for urban areas and Rs 10,000 for rural areas. |
| 2 | Source of Income | The applicant must be in regular employment or have a regular source of income.
Personal loans are available to self-employed individuals like doctors, chartered accountants as well. In case of employment, the lender expects at least 1 year experience from the current employer. |
| 3 | Documentation | Proof Identity
Address proof /address of office Proof of continuity of business 2 Passport size photographs Income proof: Individuals in regular employment – 3 months’ pay slip latest, 3 years Income Tax return In case of self-employed individuals – financial statements of 3 years, Income Tax return of past 3 years If you have joined employment or started your business just before a year, bank statements of last 6 months |
| 4 | Loan eligibility | The personal loans are offered from Rs 50,000 to Rs 50 lakhs. The eligibility for the amount depends upon the net monthly income and credit history. For example, With a net income of Rs 15,000 per month you can get a personal loan up to Rs 10 lakh from Union Bank of India. |
| 5 | Credit score | 650 is expected minimum credit score
750+ can fetch you great offers and higher the amount of loans. |
| 6 | Existing loans and obligations | Your existing home loans, credit cards and all obligations will be considered for assessing the eligibility for a personal loan.
The amount that you are already committed on the loans, repayment history, and repayment capacity counts a lot in getting the required amount of personal loan. |
Important things to know as how lenders calculate your eligibility
Given the numerous factors, you may have that big question still as to how the metrics arrive. The banks use two major criteria to assess an individual’s eligibility for a personal loan.
Fixed Income to Obligation Ratio (FIOR)
It is also known as the debt-to-income ratio. As the name indicates, it is a measure of your ability to meet the total current financial obligations with your fixed income. In other words, say your fixed income is Rs 20,000 and your total EMI is Rs 7,500, your FIOR is 0.375 or 37.5%.
It means that you still have 62.5% of your income for meeting any further fixed loan obligations. But the lenders have fixed a benchmark for FIOR. Anything below 50% is acceptable. When your FIOR crosses 50% that is your EMI obligations are more than 50% of your monthly income, personal loan applications are rejected.
Net Monthly Income:
This is a multiplier method. A fixed multiplying factor is applied to your net monthly income to arrive at the maximum eligibility for a personal loan. For instance, if your net monthly income is Rs 15,000. You can get a maximum of Rs 4,50,000 as a personal loan. (Rs 15,000 x 30).
What if I do not meet some of the eligibility requirements?
You may not be able to get what you ask for. The lender may still consider you for a lesser amount of a personal loan. But before applying for a personal loan ensure you meet all the eligibility requirements. The rejection of a loan application will also reduce your credit score. You can also use a personal loan eligibility calculator provided on most of the websites of lenders. It will ask for basic details like name, age, net monthly income, existing EMIs, payment tenure, etc. for calculating your eligible amount of loan.
Consider including the following habits to improve your chances of getting a personal loan.
- Try to keep a track of your credit score. Pay all your EMIs, and credit card bills on time. Having good financial discipline in repaying your debts helps to achieve a good credit score.
- Consider keeping your existing debts as low as possible. This aids in having a good credit mix and credit utilization ratio. Lower the credit utilization ratio and higher the credit score.
- Borrow only what you need. The offers and the desires may be so tempting. But be concrete about what is the amount you need as a personal loan and how are you going to spend it.
- Take the help of a co-applicant. The consolidated income of both applicants shall increase the chances of getting the desired amount of personal loan.
Conclusion:
A personal loan is an unsecured loan. There are no collaterals required. It is given purely based on the creditworthiness of the borrower. The interest rates are high owing to this risk. There is no restriction on the usage of loans. It is simple and convenient to get a personal loan but the true rewards of getting a personal loan lie in its judicious usage and prompt repayment.
