The loans which depend upon the borrower’s credit history and his ability to repay them from his personal income qualify as personal loans. Repayments are done in fixed installments over a fixed period of time. Your credit score determines the interest rate. There are basically two types of personal loans: unsecured loans, and the secured ones.
Types of Personal Loans:
Unsecured loans are not secured by collateral like your home, or vehicles etc. interest rates or these are usually higher because of the unreliability and thus lenders are reluctant when giving these loans. They do a thorough background check to ensure that the borrower is trustworthy.
In secured loans, the loan is secured by collateral and thus the interest rates are lower. Examples are mortgages, home equity loans, and vehicle loans etc.
In any type of loans, the lenders have set an eligibility criterion for the people who wish to borrow money. This criterion is usually based on the following:
- Credit score
- Current income
- Employment history
- Equated monthly installment
- Repayment history
The lender checks your credit and employment history to see what type of borrower you are to avoid any risks of scamming. Keep checking the requirements for applying for personal loans online. Each bank has a different set of rules, make sure you are well acquainted with them and you fulfill the criteria too to borrow money from your choice of bank.
The lender carries out a background check on your credit score. This score determines whether you are eligible for the loan or not. Make sure to keep this as strong as possible to increase your chances of getting a loan.
The three credit reporting agencies-Experian, TransUnion, and Equifax-offer you a free credit check each year. Get each one’s report to determine your credit score. Your credit card issuer might also give you free access to credit scores.
You can increase your credit score by keeping a low balance on credit cards and other ‘revolving cards’. Pay your debts off and ask for a credit-limited increase on current cards. You can raise your score by up to 30% by increasing your credit limit, which is the amount of debt you have divided by your current credit. However, don’t close the unused credit cards to boost up your score and don’t open new credit cards which you don’t need to have a short-term increase in score.
Current Income and Expenses:
Your total monthly income and expenses are other important factors which can improve your chances of getting a personal loan. It doesn’t matter what amount of money you make each month, the lender takes interest in the amount of debt you have to pay on things like vehicle loans, property loans, credit cards, mortgages, etc.
The main focus is on debt-to-income ratio, which is your monthly debt divided by your monthly income and multiply by 100. For example, if you earn $3000 per month and pay $300 as debt, your DTI ratio will be 10 percent. This percentage should not exceed 43 percent, which is he maximum mortgage the applicants can have.
Note: Don’t confuse a DTI ratio with the loan-to-value ratio. Your LTV ratio is your mortgage loan amount divided by your home’s purchase price or appraised value.
Your employment history means information about your past employers, employment dates, designations, salaries earned, bonuses rewarded, and duties attended to for a certain amount of time. A good employment history doesn’t necessarily mean that you have worked for the same company for several years.
The lenders want to see if you have been adhered to the same field of work for several years instead of changing jobs every now and then. This proves that you are a stable employee. The applicants who don’t have employment stability have lesser chances of receiving the personal loans. You need to provide in-depth information about your source of income.
Equated Monthly Installment:
The equated monthly installment is the sum of money you need to pay each month or in each interval to pay your loans in time. The lenders calculate this money and compare it to your monthly earnings to see if the amount is payable for you or not. The more you are capable of returning the loan along with the interest in the fixed amount of time, the more chances you have of receiving the loan. This installment also depends on the interest rate and time period of the loan.
Your previous loans repayment history has a great impact on your eligibility for receiving the loan. Unpaid debts can stay in your records for as long as seven years which will stain your credit history. If for some reason you have a late repayment splotch on your credit history, you can write a goodwill letter to the creditors asking them to remove the late repayment records from your credit history.
Other Personal Loan Application Considerations:
For some lenders, your reason for borrowing money matters. You might have an exceptional credit history and repayment records but if you don’t have a strong enough reason to borrow money, you might not get the loan. Also, the amount of money you wish to borrow is important. If the loan you’re applying for is huge, the lender might not take the risk of giving you the loan. Moreover, the banks take into consideration your length of residency and relationship with the bank
Borrow only the amount of money you need. Sometimes, the lenders offer you more money than you need. Keep in mind that huge amount of loan comes with huge interests.
You can determine your eligibility by online using the loan eligibility calculator. It will help you calculate your chances of getting a personal loan. Once you secure the loan, make sure to make payments on time to keep your credit history free of any late repayments stains.