Personal loan application: How does credit score matter and what are the other factors considered?

Before applying for a personal loan with any bank, NBFC, or fintech, make sure you check the eligibility criteria. Without fulfilling the eligibility criteria, your application will be rejected resulting in disappointment. The credit score plays an important role in personal loan approval. 

The other factors include the individual’s age, income, employment, KYC, debt-to-income ratio, city of residence, etc. Let us discuss the role of each of these factors in personal loan approval.

Personal loan application: The importance of credit score

The credit score is a three-digit number given by the credit information companies (CICs). There are 4 RBI licenced CICs in India:

1. Credit Information Bureau (India) Limited (CIBIL),
2. Equifax Credit Information Services Private Limited,
3. Experian Credit Information Company of India Private Limited and
4. CRIF High Mark Credit Information Services Private Limited

All four CICs have their own proprietary algorithm for generating an individual’s credit score. The credit score reflects the individual’s financial behaviour and creditworthiness. While approving personal loans and other loans, banks and NBFCs give a significant weightage to the applicant’s credit score.

Banks and NBFCs consider a credit score of 750 and above a good score for approving personal loans. The higher the credit score, the better the chances of the personal loan getting approved, provided the applicant fulfils the other eligibility criteria.

If the credit score is significantly higher than 750, the borrower can use it to their advantage to negotiate better terms with the lender. These include a lower interest rate, discount on or a waiver of processing fees, higher loan amount, higher tenure, etc.

If the credit score is lower than 750, it doesn’t mean your personal loan application will be rejected. Some banks and NBFCs may consider personal loan applications with a lower credit score and approve them on a case-to-case basis. They may charge a higher interest rate or other terms and conditions. For example, the HDFC Bank mentions that a CIBIL score above 720 is considered good for sanctioning a personal loan.

Personal loan application: Importance of other factors

Apart from the credit score, the other factors that play an important role in personal loan approval include the following.

Age: Every bank and NBFC can determine the minimum and maximum age for personal loan applicants. The applicant’s age should be within this band for the application to be considered for further processing.

For example, the Kotak Bank website mentions the age criteria for personal loans as follows: “Individuals aged between 21 years and 60 years are eligible”. The HSBC Bank (India) website mentions the age criteria separately for salaried and self-employed individuals. For salaried individuals, the age criteria is between 21 to 60 years. For self-employed individuals, the age criteria is 21 to 65 years.

Income: Banks and NBFCs mention the minimum income to be eligible for personal loans. For example, the Axis Bank website mentions the minimum net monthly income separately for Axis Bank customers and others. For Axis Bank customers, the minimum net monthly income required is Rs. 15,000. For non-Axis Bank customers, the minimum net monthly income required is Rs. 25,000.

Similarly, the DBS Bank (India) website mentions the minimum monthly income requirement as Rs. 25,000.

Education qualification: Some banks and NBFCs specify the minimum education qualification to be eligible for personal loans. Usually, the minimum education qualification requirement is graduation or a diploma. For example, the Kotak Bank mentions the education qualification as graduation/diploma.

Employment: With the employment details, the bank or NBFC assesses the career stability of the personal loan applicant. With a stable career comes regular monthly income, which, in turn, can be used to pay the personal loan EMIs. If you are working with a reputed employer like a well-known private company, Central or State Government, PSU, etc., it increases the chances of loan approval.

For example, the Kotak Bank website mentions that a personal loan applicant must possess at least one year of work experience. The HDFC Bank website mentions the applicant must have at least two years of work experience, of which a minimum of one year must be with the current employer.

Debt to income ratio: The debt to income (DTI) ratio measures the percentage of monthly income being spent on servicing debt obligations. These include existing loan EMIs and credit card monthly bills. Banks consider a DTI ratio of 35% or less good for approving personal loan applications. The lower the DTI, the higher the chances of loan approval.

Some banks may consider a DTI ratio in the 36 to 50% range for approving applications on a case-to-case basis. They may be approved with additional terms and conditions. For applicants with a DTI ratio above 50%, the probability of approval goes down significantly.

Application form and documents: While applying for a personal loan, online or offline, you must submit the duly filled application form and the required documents. The KYC documents include a photograph, a copy of your identity proof (PAN card), and address proof. The income documents include a bank statement and salary slips for salaried, and Income Tax Return (ITR) and bank statement for self-employed, etc.

If there are any mistakes in your application form or any KYC documents and income documents are missing, the bank will put your application on hold. They will contact you to make the corrections or submit the appropriate documents. If you don’t make the corrections or submit the documents within a specified timeline, your personal loan application will be rejected.

Applicant’s city of residence: Some banks and NBFCs operate in limited cities. They source personal loan applications from residents in those cities only. For example, the HSBC Bank website mentions a list of specified cities, the residents of which can apply for a personal loan.

Most banks and NBFCs have a presence in metros and Tier-I cities. As a result, the applicants residing in these cities have more options to apply for personal loans. Due to the lower presence of banks and NBFCs in smaller towns and rural areas, the personal loan options for residents in these places are limited.

Understanding the eligibility criteria will increase personal loan approval chances

These days, applying for a personal loan is quick, easy, and convenient at your fingertips. It can be done online from the comfort of your home. However, before applying for it, you must check the lender’s personal loan eligibility criteria. It is important to ensure you fulfil the eligibility criteria to avoid rejection and face disappointment later. Hence, you must understand the personal loan eligibility criteria discussed in this article as it will help increase your chances of approval along with getting better terms. 

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.