Personal loans have been the most feasible form of debt when it comes to meeting expected expenses. Over the years, it has become the most favourable option for millennials to meet various cash requirements at different stages in life. Traditionally, loans were considered a liability. However, with the rise of new age lenders, innovation and automation has made this credit instrument flexible, easily accessible and more affordable. Gen Y has seen a change in spending patterns thus, reliability on credit products have seen an increase in the past few decades.
As personal loans do not demand the borrower to pledge a collateral against the extended sum, lenders scrutinise each application before taking a decision regarding whether or not the applicant is eligible for the loan. Lenders gauge the risks involved in extending credit to any and each borrower. This article will spell out the critical components considered by Banks / NBFCs while assessing the creditworthiness of applicants.
1. Credit score
Every borrower is aware that the most crucial and primary step in availing a personal loan would be ‘credit checks’. A credit score is a summarised figure that clearly indicates the credit habits, credit history and credit worthiness of a borrower. CIBIL (Credit Information Bureau of India Limited) is one of the most trusted credit information and rating companies. They collect each individual’s information regarding credit patterns, payment history, existing / closed loan accounts etc. They create a credit information report for each candidate and determine a credit score. This three digit number (between 300-900) clearly spotlights the credit worthiness of applicants. Applicants with a credit score of 700+ are more likely to get the best offers on personal loans.
2. Monthly Income
A fixed steady income assures the lender that the borrower has a fixed amount at his disposal each month. They would assess the monthly expenses against the monthly income to determine the amount a borrower would be able to keep aside for his loan obligations. This parameter helps the lender decide the loan amount and the loan tenure of the personal loan that can be extended to the borrower. Thus, the lender demands for salary slips and bank account statements to gauge the eligibility of the applicant.
3. Employment Stability
An applicant who has a stable job for a long span of time is considered to be more reliable. Someone who frequently changes jobs might at some point in the future have a job loss situation and might not be able to repay the loan. Most lenders also consider the Employer’s reputation to determine the consistency of income. They may demand verification of the workplace to be certain about the level of stability and reliability involved in the current job.
4. Residence Stability
It is a common practice for professionals to stay away from home or move to other cities for work. However, if an applicant is seen to switch homes very frequently, it will deter the lender from extending a loan to them. This is because the lender is going to be uncertain about the contactability parameter in such cases. One might be asked to present more documents and might have to undergo additional verification in order to satisfy the lenders plight. Thus, applicants that are much within the reach of lenders are more likely to acquire a loan.
5. Credit Profile
A lot of components are covered under this category. Broadly, this involves everything related to income, expenditure, obligations, credit habits etc. The lender will inspect the past and present credit profile of the borrower to determine the following –
Repayment capacity – It is certain that the lender would want to know the number of on-going loans that the applicant is servicing. This will ascertain the capacity of the borrower to take up more obligations. Too many on-going loans can be a deterrent for lenders as they may be indecisive about the repayment capacity of the individual.
Debt to Income Ratio (DTI) – Debt to Income ratio is nothing but the amount of debt availed against the income. The proportion of one’s income that is disposed off towards debt obligations helps derive the DTI Ratio. Lenders use this vital statistics to determine how responsibly one pays of his/her debts. A healthy DTI ratio (30-50%) is an indicator of good financial management.
Credit Utilisation Ratio (CUR) – A Credit Utilisation Ratio is determined by comparing the Credit used against the credit made available to the borrower. For instance, you have INR 3,00,000 limit on your credit card and you use INR 1,50,000; your credit utilization ratio is 50%, which is considered as a high CUR. Individuals with a CUR of 30% and lower are more likely to be considered eligible for a loan. A high CUR impacts the credit profile negatively reducing the chances of loan approvals.
Although the personal loan eligibility criteria differs from lender to lender, these are the common cluster of components that every lender will consider while assessing each application. Any individual can adopt a few healthy credit habits to make their profiles credit worthy!