When a self-employed individual applies for a Personal Loan to a bank or NBFC; the lender considers a few factors before approving the finance. The consideration for loan approval depends on the financial eligibility factors including age of the borrower, the reason for the advance and alike. Well, there is no denying the fact that credit score of the individual is one of the most important factors considered by the banks.
Critical Factors that Define Approval of Personal Loan for a Self-employed:
- Income Tax Returns:
First of all the bank would consider if you have filed your income tax returns on time or not. Lenders are exceedingly particular when it comes to Income Tax Returns (ITR) for a minimum of last three years of individuals approaching for a PL.
- Existence of the Business:
The time span of a business assures the lender about the reliability and sustainability. Your business duration actually ensures if you can pay back the loan in time. The stability of the business and your source of income is truly essential.
- Income and Profits:
If you are able to repay without defaulting is the primary concern of the lender. Your disposable earnings as a self-employed professional would help the lender to assess your capacity to repay the loan.
- Nature of the Business:
Some businesses could be unstable or rather seasonal. This definitely won’t give adequate assurance to the bank about your repayment ability every month. The kind of business, therefore, does play a vital role when you apply for a personal loan as a self-employed individual.
- End use of the fund
You need to declare the purpose of availing the loan. The bank judges if it is your actual need or just self-indulgence.
- Cibil score (Credit History):
When you approach a bank as a self-employed individual for personal loan they need to ensure if you are worthy of receiving credit or not. This worthiness depends on how good you are with your finances. If you have serviced loans successfully earlier; it confirms that you would be repaying the loan on time without missing payments. The process that banks and other financial institutions follow to know your credit worthiness is through your CIBIL (Credit Information Bureau Limited) score.
- Your age:
On age the factor, consideration may differ from lender to lender. A self-employed person should be within 25 to 65 years of age.
- Right Documents:
Never submit fake documents to the bank when you apply for a personal loan.
Now, while all these factors play a noteworthy role, whether a PL would be approved for a self employed, Cibil score (Credit History) turns out to be the crucial one.
So before applying for the loan it is important that you ensure that you have a good score.
What factors lower CIBIL Score?
- Too many Personal loans
- Missing loan installments
- Coming too close to the limit on credit cards
- Not paying credit cards back on time
- Not paying credit cards in full
- Too many rejected applications for loans/credit cards
- Settling credit cards
However if you have a low CIBIL score, you need to know how to get Personal loan for Low CIBIL score.
While the CIBIL data says 80 per cent of the loans that get sanctioned have a score higher than 750; nevertheless, the CIBIL score is not the only factor which lenders take into consideration while deciding and approving a Personal loan to a self-employed individual. A mainstream bank may ignore a credit card default in the past if you have a regular good income flow. Your future financial prospects, demographics, education, socio-economic conditions may help you in getting a PL despite your low CIBIL score.
NBFCs (Non-banking financial Institutions) are relatively flexible with credit scores and the cut-offs as compared to banks. If you have a low credit score, you are advised to approach a NBFC instead of a mainstream bank.
You may choose to approach a Peer-to-peer (P2P) lending website. You may get a personal loan regardless of your low credit score.
If the cause for your low score is a failure to pay, it is suggested to clarify the lender why you had failed to pay. In case it was not an intentional default; lenders at times might excuse. If you have a convincing explanation with evidence say, you had a sudden loss in business or there was a medical emergency for which you couldn’t afford to pay back; put across clearly. If found authentic; the lender might consider.
All in all if you make plan thoughtfully you could easily grab the best deal!