How Do Banks Decide My Personal Loan Eligibility?

Personal loans can help you consolidate debt or afford big purchases. Because you do not offer collateral, like your house or car, when you apply for a personal loan, lenders heavily weigh your creditworthiness when considering your personal loan eligibility.

When you apply for a personal loan, your lender will review your credit score and report. Lenders will also consider your outstanding debts, mortgage or rent payments and other financial obligations. Consider the following ways banks evaluate you. You can find ways to improve your chances of obtaining a personal loan at a competitive rate.

Keep Reading: 5 Things Everyone Gets Wrong About Personal Loans

5 Ways Banks Determine Personal Bank Eligibility

When you apply for a personal loan, your lender might use a personal loan calculator to help them make a lending decision. You can use this type of calculator to help you get a general idea of how lenders view your creditworthiness. Keep in mind that while you might qualify for a personal loan, your eligibility will help determine the amount you are allowed to borrow and at what rate.

1. Credit Score

When you apply for a personal loan, the financial institution considering your application will look at your credit score. Your credit score is a numerical representation of your overall credit history. Because your score can have a strong bearing on your personal loan eligibility, you will want to review your credit report to ensure it is free of errors and up to date.

2. Current Income

Your current income is another factor banks take into account when determining your ability to pay back a loan. Your income, after all, is the most direct way you’ll afford to pay back a personal loan. Banks will look at your income relative to how much debt you currently have. This is known as your debt-to-income ratio. Banks look at your debt-to-income ratio to determine if you can comfortably pay back your loan.

As a general starting point, lenders like to see that your monthly debt payments are below 15 percent of your income. This ensures that you can pay for other needs, like food, shelter and clothing.

3. Employment History

Your employment history might also affect your personal loan eligibility. Lenders frown on borrowers who frequently change jobs or are self-employed, as it can be a reflection of financial instability.

“The longer you have worked in one place, the more stable your income will appear to a lender. For this reason, banks tend to be harsher about self-employed applicants,” Dennis Leontyev, president of InterMarket Edge, told GOBankingRates. Leontyev frequently consults business owners and high net worth individuals.

Being self-employed is not prohibitive, however. You might simply need to provide more in-depth information to your bank to qualify for a personal loan.

4. Equated Monthly Installments

When you fill out a personal loan application, you might be asked how much you make at work and how much of your monthly budget goes toward financial obligations, like child support or your mortgage. Your lender might also use an equated monthly installment (EMI) calculator to determine your future personal loan payments. By considering your current financial obligations and the monthly payments you will pay on a personal loan, a bank can determine if you are a good candidate.

You can find EMI calculators online. By inputting simple information about your finances, you can determine what you can afford to pay on a personal loan month to month.

5. Repayment History

Your credit report details your repayment history. Your lender will see how often you have been late on payments, how late and if you have a history of not paying back on loans. Student loans, mortgages, auto loans and credit cards are included in your credit report. Keep in mind: Your lender can see between seven to 10 years of your repayment history.

Other Personal Loan Eligibility Considerations

Banks will typically consider additional factors before lending to you, such as how you plan to use your money. Lenders will also consider the state of the economy, particularly in the area where you file your application. Your age, length of residency and relationship with the bank can also be a factor.

Ultimately, your personal loan eligibility will be based on many factors, some beyond your control. Having a realistic view and a disciplined approach can improve your chances of getting a personal loan. Once secured, diligently paying your back loan on time will help insure that the next time you need a loan, your lender will be there to help.

 

This article originally appeared on GOBankingRates.com: How Do Banks Decide My Personal Loan Eligibility?

This article by Douglas Ehrman first appeared on GoBankingRates.com and was distributed by the Personal Finance Syndication Network.