Personal loan: How to improve your chances to procure a loan? 7 key things to know

If you are staring at an urgent financial need at present, or have something urgent lined up in the near future, what you can do – among other things – is to raise a ‘personal loan’.

For the uninitiated, a personal loan is an unsecured loan offered by a financial institution i.e., a bank, an NBFC or a fintech app, to help you meet an unpredictable need for money which could be as varied as to organise a wedding, to buy a luxury item, to go on a vacation, or to meet a personal emergency, among other reasons.

Being an unsecured loan, it is perhaps not as easy – relatively speaking -- to raise a personal loan as it is to raise other secured forms of loan such as a car or a home loan.

Interest charged on a personal loan is also typically higher in the range of 11-17 percent per annum than what is charged on secured loans. Here we discuss a few tips to raise your chances of procuring a personal loan. These are some of the things you should know in order to improve your chances.

7 key tips to know to improve your chances of securing a personal loan

1. Credit score: It’s very important to have a high credit score in order to get a personal loan. If your credit score is above 750, the chances of getting a personal loan would be high. Conversely, a poor score lowers the chances of procuring a personal loan.

2. Income tax return: Another factor that matters in helping you secure a personal loan is filing of income tax return on a regular basis.

Oftentimes, your personal loan application will require you to submit form 26AS to indicate the tax paid during the past two years before they determine your eligibility to raise personal loan.

3. Salary above a threshold: Typically, personal loan is given only when your monthly salary is above a minimum of ₹25,000 per month. But this is the minimum threshold. So, if you don’t fall in this tax bracket, you can wait until you do before applying for a personal loan.

4. Work for a year: Another criteria that changes your loan-taking ability is your association with the employer. If you have worked with your current employer for a year or longer, your chances of procuring a loan become higher.

So, if you have just started working with your employer, you must spend some more time before you apply for a personal loan.

5. Your residential address: Another key criteria that changes your loan taking ability is your current address. If you have been staying at the current address for a few years, the credit department of the bank becomes more confident in granting the loan approval. On the contrary, if you are new to the city or state where you are currently staying, it may work against you.

6. Guarantor: Additionally, banks also ask the applicant to give guarantee of someone you know. This also improves your chances of being given the approval.

7. Category of employer: Last but certainly not the least, the category of employer matters a lot. If your employer is central or state government, a PSU or even a large corporation, getting a personal loan is quite easier than if the employer is a small enterprise or if you are a freelancer.

It is worth noting that even self-employed persons can also secure personal loans subject to meeting other criteria such as income tax returns (ITRs), high credit score and a high earning potential, the right age, among others.