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Criteria That a Bank Looks at Before Approving your Loan


Criteria That a Bank Looks at Before Approving your Loan

  • By Saral Credit
  • September 27, 2021

Believe it or not, loans have become a necessity in today's era. People with stable income sources have dreams to fulfill. However, they don't have enough funds to pay upfront and bring their dream into reality. That's the reason they always look for a reliable loan that can help them fulfill their dream with a small initial deposit and pay the rest via monthly installments.

Loans have become common due to numerous reasons, and the ongoing global pandemic is one of those reasons.

Today you can get a loan for almost everything. Presently many banks are providing personal loans for COVID treatment.

If you are one of those professionals planning to take a loan, you must know that every bank matches you with their checklist and ensures you fit their eligibility criteria. If you fit well, you are good to go. However, if you don't match their checklist, getting your desired loan amount is tough.

Before proceeding towards the checklist, you must have basic knowledge about different types of loans.

Broadly loans are categorized based on collateral. All loans where the collateral is kept as security are termed as secured loans while others are terms as unsecured loans.

Below is the list of secured and unsecured loans that you can choose.

Home Loan: A home loan is a secured loan that offers you to get your dream home with complete peace of mind. Home loan is further classified into multiple loan options that are all associated with buying/constructing your dream home.

  • Land Purchase Loan:  If you are planning to build a new home but don't have a property yet, banks allow you to purchase land on loan and start your construction as per plan.
  • Home Construction Loan: If you have a property but don't have enough funds to construct your home, the home construction loan can help. Banks provide you a loan to build your new home.
  • Top-up Loan: People with ongoing home loans often require an additional loan to renovate their home. For such purposes, banks provide you top-up on your existing loan.

Loan Against Property:

If you urgently need money but have no liquid cash, most banks offer a mortgage loan. Here you can keep your commercial, residential or agricultural property as collateral and get sufficient funds for a fixed time. Once you repay all the dues, you get your property documents back.

Mostly you are eligible to take a loan of about 50-60 percent of the property value. However, some banks can even provide you with funds up to 80 percent of property value.

Gold Loan: Gold has been one of the financial assets loved by middle-class people. Based on its availability in India, numerous banks nowadays provide you a loan against the gold you own. Numerous financial institutions offer you loans at low-interest rates.

Personal Loan: Personal loan is one of the commonly used unsecured loans offered based on your credit history. A personal loan has become a trend for people of all age groups to fulfill their emergency financial needs. Personal loans are offered for numerous purposes, including:

  • Personal Loan for Students
  • Personal Loan for Salaried
  • Personal loan for government employees
  • Personal Loan for Teachers
  • Personal Loan for Women

Short Term Business Loan: Every day, numerous startups enter the market, which makes it tough and challenging for them to enhance their business. Hence, they require funds for various purposes. Banks are available to serve their needs and provide loans for various purposes.

Education Loans: Not everyone has sufficient funds to provide a handsome education to their kids. Aspiring students who want to do higher studies but don't want to put a financial burden on their parents opt for an education loan. Hence they look for an education loan that can take care of their financial needs. In this loan, the parents are considered as co-applicants. The best part of an education loan is that EMI starts after one year of education completion.

Vehicle Loan: Vehicle loan is the second favorite loan option after a personal loan. A vehicle loan helps you buy your dream car or bike with monthly EMI. The best part of getting a vehicle loan is that some banks allow you to get a vehicle loan with zero down payment.

Among all loans mentioned above, secured loans have a lower interest rate compared to unsecured loans. This is because unsecured loans have a high risk of default, as they don't require collateral.

Now you have sound knowledge about the different types of loans available for a working professional. The next big query is what makes a professional eligible for a loan. In other ways, what pointers are checked by the banking systems before granting loan approval?

Below are the points that every bank or NBFC considers to provide you a loan.

Your Credit History: Every bank prefers professionals with good banking habits. A good credit score tells the discipline of a person towards paying the dues, existing EMIs, etc. A person who always pays the dues before the last date and has a clean character in repaying the dues has high eligibility to get a loan.

The credit history is calculated in the form of a credit score. A good credit score varies between 700 to 800.

Your Occupation: You are already familiar with the fact that banks have minimum queries with government professionals. The reason being people with stable job have a high potential to repay the loan amount. Moreover, banks also prefer blue-chip companies that have a global presence and high job stability for their employees.

In short, people working in private startups have the lowest ranking in terms of getting a loan. This doesn't mean they can't get a loan. Regular income is still considered a strong factor for loan eligibility.

Your Age: Age is yet another crucial factor that is considered in loan approval. The older you are, the lower life expectancy you have. Moreover, with older age, you get less time to repay the loan amount.

Hence, youngsters with handsome income are more preferred with old age people with the same income.

Your Work Experience: Your loyalty towards your current company is acknowledged with your working experience. Banks always ask for your work experience with the current company. This helps them recognize your job-switch frequency. E.g., People working for 10+ years in a company have a high preference over people working for a few years in a company.

With this, the stability factor is also acknowledged to ensure the trustworthiness of the company.

Income Source of Your Spouse: If you are a working professional in the private sector, banks will always consider your spouse's income as well. Spouse income is considered to ensure in case you fail to repay the EMI; your spouse can continue the repayment without delay. With a working spouse, banks stay assured of no default scenario.

Another reason for considering spouse income is that her income is added to your income to derive your monthly income. This helps you take a bigger loan hassle-free.

Repayment Period: Every loan has a maximum repayment period. E.g., A housing loan has a maximum repayment period of 25 years. However, not everyone considers such a long repayment period. Banks always prefer people that choose a longer repayment period. Moreover, banks don't consider professionals who opt for a short loan period. This is because a short loan period results in low interest, which doesn't satisfy the banks.

Hence, banks are always happy to pay you a loan for more than five years, depending upon what type of loan you are looking for.

Your Relationship With Bank: Nowadays, everyone has a salary account where (s)he draws the salary. Based on your salary and other facilities, you build a relationship with the bank, which is a positive signal when opting for a loan. Regardless of your loan type, relationship with the bank is always considered a factor in getting quick approval and disbursement.

E.g., if you have a salary account in a particular bank. Simultaneously, if you own a credit card, vehicle loan, and a few other financial assets from that bank, you have a high variability of getting another loan. However, all other factors are still considered before approval.

So, these are the prime factors that are considered when you look for a loan. Every bank or NBFC considers these factors to ensure you are the right person to lend the money.

If you are already a defaulter (in any way) it's crucial to first clean your credit history and start building it from scratch. No financial firm can lend you money in case you have bad credit history. Instead, a defaulter is blacklisted from applying for a loan in any banking firm across the country.

In the end, it's crucial to keep in mind that you are the one who has to repay the loan. Hence, it's essential to think twice before selecting the loan amount and plan its repayment without facing any financial crisis.