6 Common Factors That Affect Your Loan Eligibility

Various factors go into determining your eligibility when you apply for a loan. Every loan product has specific eligibility criteria. However, specific common elements can make or break your chances of getting a loan.

1. Credit Score

A Credit Score is the most crucial aspect of any loan appraisal. Banks give great importance to the credit score. What is a good credit score? It depends on the type of loan you apply for. Banks consider a minimum score in the range of 750 for a personal loan approval or a credit card. At the same time, a score of 600 to 650 is considered acceptable for a Home Loan. If you want an unsecured loan, you need a higher credit score.

How do you manage your credit score?

• Repay your loan instalments in full and on time
• Maintain the right Credit Utilisation Ratio (CUR). It should be around 25-30%.
• Maintain the right balance between secured and unsecured loans.
• Refrain from applying for loans frequently. Your credit score goes down with every inquiry.
• Check your credit report for inaccuracies and dispute them if you find any.

2. Income:

Your income is also a deciding factor in determining your loan eligibility. How are you going to repay the loan? Naturally, it is from your income. You need to have sufficient funds for your regular expenses. Banks give weight to this factor. It brings us to the concept of ‘take-home pay.’ Banks have specific norms for calculating the take-home pay. The take-home pay norms for a personal loan or a loan against property are higher (usually 50%) whereas the take-home pay norm for a home loan is around 40%. Banks look at both the gross income and the deductions by way of income tax, loan instalments, and so on. Therefore, a higher take-home pay percentage is a sign of higher eligibility.

3. Type of Employer

Your income is essential, but the continuity of income is vital. A lot depends on your employer. Banks consider the type of employer very seriously. A salaried employee from the Central or State Government or a Public-Sector Undertaking unit has a higher chance of loan approval as compared to the salaried employee from a private sector employee. The reason is straightforward. Government jobs have an air of stability around them. Banks consider a role in the private sector as a volatile one.

In the private sector, there are corporates and other smaller business establishments. Naturally, a corporate employee is at an advantage when compared to an employee from the unorganized sector. Banks are also wary of specific governmental departments when appraising loans. They consider a job in the Armed Forces and the Police department as a risky one. Hence, a lot depends on the type of employer.

4. Type of Business or Profession

A lot of people in India are salaried individuals. They are self-employed professionals like advocates, doctors, chartered accountants, and so on. There are other self-employed persons like sole proprietors, partners in partnership firms, and directors in a joint stock company. It is not easy to determine the continuity of income and verify the genuineness. Banks rely on the audited financial statements and the statements of bank account to ascertain the income. You have the tax registration certificates like GST registration and so on to determine the genuineness and continuity of income.

Self-employed people can also apply for loans, but banks follow a different yardstick to determine their eligibility. The self-employed persons like sole proprietors can produce invoices and bills as proof of income. Co-relating these papers with the bank statements should prove the genuineness of income.

5. Collateral:

Why do you take collateral? The banks have some security to relyon in case of a default on the part of the borrower. The absence of collateral makes the loan an unsecured one. The bank does not have any means to realize its dues. It has to file a civil suit in the courts to entertain hopes of recovery if the borrower defaults payment. However, obtaining collateral enables them to dispose it and realize their dues. Therefore, the presence of collateral is vital. Of course, there are products like Personal Loans and Credit Cards where banks do not take any collateral. It explains why the rate of interest is high in such loans as compared to the ones with collateral.

6. Age of the borrower:

In India, any person over the age of 18 can enter into a contract. However, the minimum age for applying for a bank loan (other than the student loans) is 21 years. Similarly, there is an upper age limit as well. It is in the range of 60 years to 65 years. The banks ensure that the maximum age at the end of repayment period is 70 years. There are only two products in banks that do not have any maximum age limit. It is the “personal loan against pension” and the “loan against fixed deposits.”