When personal loan providers look at an application, they will review a range of eligibility factors that affect your loan approval. While your credit score is a significant factor, it is not the only one that determines if you are approved, and your loan terms. The lenders must also take into account your employment income levels, other financial obligations, the collateral you can offer and any established history with an institution.
Factors affecting loan eligibility
Here are several factors that help determine personal loan eligibility:
1. Income levels
Loan providers are looking for consistent and adequate income with existing obligations and new EMIs on the personal loan. Salaried applicants can include and provide pay slips for their last 3-6 months of earnings, any bank account statements that show salary credits received, any documents that outline your taxable income, and your IT return for the last 2 years. Self-employed applicants must submit their income tax return, profit & loss Statements, balance sheet, cash flow statements, and income tax assessment orders.
Highlighting multiple sources of long-term fixed household income can really strengthen your case, even if your primary job income is low.
For example, spousal income, rental property revenue, stock investments generating dividends, or profits from a side business should be disclosed. Having your income directly credited to accounts with the lending bank or non-banking financial companies (NBFCs) for past years adds further credibility.
2. Existing Loans and Credit Utilisation
Loan providers will examine your credit report and current loan obligations in detail before approving new borrowing. Your aggregated debt-to-income ratio compares total monthly obligations across all current loans, like home loans, car loans, personal loans, credit cards, etc, to your reliable monthly income.
Maintaining debt ratios below 40-50% is advisable for qualifying for additional credit. Higher ratios above 60% are very difficult to get approved without a co-applicant or guarantor.
So, you may need to pay some existing debts before new personal loans are considered. Clearly detail all current EMIs and interest rates charged on any outstanding loans and liabilities.
If you have high existing debt utilisation, consolidating and restructuring debts under a new personal loan with lower interest rates can still get approved by demonstrating how the restructured EMI will fit into monthly expenses.
3. Assets and Collateral
For secured loan products that require assets like property, gold, or fixed deposits as collateral, the equity value or market value available directly impacts the loan amounts you can qualify for. The more value you own in the asset without any loans on it, the bigger the loan amount banks or NBFCs will give you.
Even for unsecured personal loans, having substantial assets and investments beyond retirement accounts, emergency funds, and property already pledged for other loans helps demonstrate your financial stability to take on additional debt. This can strengthen your application despite higher debt-to-income levels.
4. Account History and Relationships
If you have banked for many years and regularly paid back past loans, this long, good history can help offset recent credit score drops when applying for a new personal loan.
Financial institutions often approve loans for borderline applicants who have been loyal customers despite temporary struggles, compared to brand-new customers with similar scores.
Small community banks and credit unions may actually decline loans for long-time customers they know personally who don’t quite meet the minimum requirements. Larger banks or NBFCs don’t have such relationships and go strictly by eligibility criteria.
The key is that years of responsible banking and on-time loan payments build goodwill and trust that can help in getting approved for credit when your score has decreased.
5. Co-applicants and Guarantors
Including a co-applicant for a personal loan application essentially means another person with better income and/or credit profile jointly applies and takes on equal obligations for repayment.
This reduces risk perceived by the financial institutions and allows them to approve larger loan amounts at substantially better interest rates than you may qualify for individually. Parents, spouses, and adult children with high credit score and personal loans may be options.
Do note - co-applicants must be aware that the loan shows on their credit history as well, so they should not accept responsibility blindly. An alternative is loan guarantors who may not co-apply but provide assurances to repay the debt in case the primary applicants are unable to pay the loan in the future.
6. Interest Servicing Funds
Certain banks offer special personal loan products where borrowers can deposit upfront lump sum amounts that cover EMIs for the first 12-18 months, or in some cases, even the whole loan tenure. This upfront payment appeals to conservative lenders as it provides an additional buffer protecting their capital in case borrowers struggle to pay EMIs later.
If your case falls slightly short of regular income and credit qualifications, this can help with approvals in your favour. The prepaid amount also helps reduce the loan principal and thus total interest expenditure.
7. Existing Relationship with the Loan Provider
Having a good relationship with the financial institution you’re applying to can be a strong advantage. If you already have a savings account, fixed deposit, or past loan history with the same bank or NBFC, it can boost your chances of approval. This is because the institution already has access to your financial behaviour and banking activity, making it easier for them to assess your credibility.
In some cases, existing customers are offered pre-approved loans or customised offers. These offers are generally based on your transactional patterns, average balances, and repayment history.
The better your track record, the more likely you are to receive favourable terms. So, maintaining a strong banking relationship, through timely payments and consistent transactions, can work in your favour when applying for a personal loan.
Conclusion
Personal loan qualification involves detailed analysis from lenders like Shriram Finance rather than just checking your credit scores. Demonstrating your income stability, responsible obligations management, substantial asset balances, relationship history, as well as options like including co-signers, can compensate for credit scores that may be less than ideal.
Educating yourself on all factors regarding personal loan approval and crafting loan application packages catered to addressing potential concerns can help strengthen your case for getting approved for the best loan products.
