Personal Loan

What Factors Impact the Eligibility for a Personal Loan?

30 Jul 2019 5 min read
Personal Loan: How Loan Repayment History Impacts the Eligibility for a Personal Loan

A personal loan is one of the most popular forms of financial assistance, which helps in meeting emergency expenses and fulfilling the wants and needs at will. These are unsecured loans and are comparatively easy to avail with an interest rate starting 10.99% onwards. The entire procedure for a loan application is easy, and hence, people usually opt for this loan when they are running short of finances. 

Key Features of Personal Loans

  1. It is an unsecured loan where you do not have to provide any collateral
  2. There is no restriction on the use of the sanctioned money
  3. Loan processing and approval is easy
  4. Interest rate is very competitive
  5. The process is online and hassle-free

To know the personal loan eligibility in detail, click here

What are the factors that impact a personal loan eligibility?

Personal loans are relatively easy to obtain. There are some simple procedures that you can follow, and if all goes well, then the loan application will get approved. HDFC personal loan and SBI Personal Loan approvals are relatively easier than others. All you need to have is the application form and supporting documents for your easy loan approval. Right. If you have valid income certificate, and recieve your salary in bank account, you can get a personal loan at a very competitive interest rate along with amazing offer. 

Although this loan approval is easy, certain parameters can impact your loan approval. Here are the factors that influence personal loan approval:

  1. Income:  Yes, your monthly income does affect the interest rate; for example, if you have a monthly salary of Rs. 50,000, the interest rate that the bank will charge can be between, say, 13% and 20%. Whereas, if the income rises to Rs. 1 lakh, then the interest rate may come down to between 11%-16%. However, it may vary from one lender to another.  
  2. Repayment History: Your previous loan repayment also impacts personal loan approval. If you have been regular in repaying the loans previously, it establishes your creditworthiness. It helps the bank decide that you are a fit candidate for the personal loan.  Most of the lenders look at the last 12 months of repayment history.
  3. Credit History: For any loan approval, banks are going to look at your credit score. A good credit history showcases the strength of your financial health, thereby helping the banks decide whether or not you are the right candidate for a personal loan. It reflects how good you have been in making the repayment of your previous loan amount. Above 700 CIBIL Score makes a winning personal loan application. It considers the following two factors:
    • Repayment of the current loan
    • Credit card bill repayment 
  4. Rapport with the bank: This might sound strange, but sharing a good reputation with the bank will help you get the loan easily or get some deduction on the interest rate.

With all these factors in your radar, you would be easily able to crack the deal with the bank and help them approve your loan request.

How loan repayment influences the eligibility for a personal loan

Before heading to understand how loan repayment impacts a personal loan, it's essential to understand how your repayment history impacts personal loan eligibility. Whenever you approach a bank, for example, you want to apply for HDFC personal loan, you need to submit the application form. One of the critical documents asked by the bank would be your bank statements (last six months) and credit history. This credit history is a depiction of your financial health. It lets the lender know how good you have been in repaying your previous loans and credit card bills. This eventually impacts the credit score or CIBIL Score.

What is a credit score?

A credit score is a reflection of the financial health of the person and his/her regularity in repayment of the loan. A lower credit score means poor repayment track record, and a good score means a good credit record. While applying for a personal loan, the bank is going to have a thorough check of the credit report. This especially becomes important when it comes to a personal loan, because this loan is unsecured, and there is no collateral. The lender takes into account your repayment history, and credit score becomes a benchmark of your credibility.

Credit Information Bureau of India Limited (CIBIL) has a complete record of all the loan repayments and credit history of every loan paying an individual. 

If you are not a defaulter in the list of CIBIL, then you have a better probability of getting the personal loan approved as compared to the person who has a poor track record of repayment.

What are the types of defaulters?

Non-payment or late payment may put you in the list of defaulters. These are further bifurcated into the following types:

Minor Default - If you have delayed or missed the payment, but for less than 90 days, then it temporarily affects your credit score. And, you get into the list of minor defaulters.

Major Default – In case you have delayed or missed the payment for more than 90 days, then you get into the list of major defaulters. You fall in the category of the non-performing asset; this will permanently impact your credit score. Hence you must make sure that you don’t fall in this category.

How do banks weigh late payments?

As mentioned above, late payments can put you in the list of defaulters. Banks will weight your late payment on the following parameters:

  1. How late was the payment, i.e., 30 days, 60 days, or 90 days? If one crosses the 90 days bar, then they fall in the category of major defaulters.
  2. When was the late repayment - If the repayment was years back, then it may not directly impact the credit score. If there is a recent delayed payment, then it will impact the credit score.
  3. Number of delayed repayments - The more is the number of delayed repayments; the adverse will be its impact on the credit score
  4. How much did you owe - if you owe a significant amount, then it will impact the score severely.

What’s next?

You can improve the minor defaults by making regular payments. Since it does not impact permanently, it can be improved over time. In contrast, major defaults are challenging to overcome.

When you are making an application for a personal loan, the bank is going to check all the documents, including credit history. So, before applying with any of the banks, make sure that you thoroughly check your credit score and repayment history.