People looking for quick access to funds use personal loans. Regardless of whether you are consolidating debt, addressing medical expenses or even purchasing a big purchase, a personal loan will enable you to move forward. But before you apply for one, you need to know personal loan eligibility and what factors affect approval. Knowing these can boost your chances of getting a loan with favourable terms, like competitive personal loan interest rates.
- Credit Score and Credit History
Your Credit score is one of the most important factors in determining your personal loan eligibility. Lenders use your credit score to figure out how vulnerable you are to lend to. A higher score indicates you are a lot less risky, and that could improve your odds of getting approved for a loan and obtaining lower personal loan interest rates.
Credit scores typically range from 300 to 850. Nearly all lenders need applicants with a score over 700, though you can qualify with a lower score at higher interest rates or more stringent conditions. Lenders will also check your credit history for red flags, like missed payments or high levels of outstanding debt. A clean credit history will work in your favour.
- Income and Employment status
Your income and employment status decide if you can get a personal loan. Lenders want to ensure you can make the loan repayments comfortably. Nearly all lenders would like applicants to have stable, full-time employment, although many will consider applicants with freelance or part-time income as well.
Lenders will look at your debt-to-income (DTI) ratio – your monthly debt payments compared to your gross monthly income – when assessing your income. Your DTI ratio should be below 40 %, which indicates that you can service your debt obligations while still paying off a new loan. If your DTI ratio is too high, it could be a red flag for lenders and ruin your personal loan eligibility.
- Loan amount and Term
The amount you want to borrow and the loan term (the time frame in which you’ll repay the loan) are factors in determining your personal loan eligibility. Lenders may have minimum and maximum loan limits – make sure the amount you request is within their range.
Likewise, the term of the loan can affect eligibility and interest rates. A shorter loan term generally has lower interest rates and higher monthly payments; a longer term might have less expensive monthly payments but higher total interest expenses. Carefully consider both when applying to avoid surprises during the approval process.
- Existing Debt
Lenders will review your existing debt to determine if you can afford to take on more debt. When you owe a lot more than your income, you might be a higher risk borrower. High levels of existing debt can impact your eligibility and the interest rate you get.
A few of your outstanding debts such as credit card balances or maybe additional loans, can be paid down just before you apply for a personal loan. This will boost your debt-to-income ratio and turn you into a much better prospect for lenders.
- Personal Loan Interest Rates
While your eligibility for a personal loan mostly depends on your credit score, income and existing debts, the personal loan interest rates offered could influence the price of the Loan itself. Interest rates for personal loans usually vary from six% to 36% based on your credit rating, loan amount and loan duration.
Excellent credit along with a reduced debt-to-income ratio could get you reduced personal loan rates which may help you save cash on the lifetime of the loan. But a poorer credit score or unstable income may lead to higher interest rates.
- Loan Purpose
Though personal loans could be utilised for any number of purposes, lenders may want to know the way you will use the loan. Some lenders may offer better interest rates for certain purposes, like home improvement or debt consolidation. Being upfront about your loan’s purpose can speed up the approval process.
Conclusion
Anyone considering a personal loan should know the factors that affect eligibility. An improved credit score, a proper debt-to-income ratio and a careful selection of the loan amount and term can boost your odds of obtaining a loan at a convenient term. Also compare offers from different lenders to find the best personal loan interest rates. These steps are going to help you make sensible financial choices and get the best from your personal loan.
