Elements that Decide Approval of Personal Loan for Self-employed

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.

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!

Should you take a personal loan when facing cash crunch?

The popularity of personal loans has soared high in recent times. In the age of instant approvals and quick disbursements personal loans have become a fast track solution for financial problems. Medical emergency in the family, child’s higher education, paying off high interest debts, funding a vacation, home improvements—these are just a few situations where small personal loans come in handy and provide quick and easy access to funds.

However, you need to be cautious while taking this loan. The temptation of quick and easy availability is so high that people often get caught in debt traps and face a crisis situation later. In order to stay financially safe be doubly sure whether you really need the loan and handle it properly once you take it.

Lenders who give unsecured personal loans offset their risk by pricing them much higher than the loans that are backed by collaterals. An extremely high rate of interest makes this form of credit quite expensive. Keep in mind the following rules before going for an easy personal loan.

 Consider your finances and borrow only the amount that you can repay

Small personal loans have short repayment tenure so large monthly EMIs can strain your budget. Your monthly outgo towards all your loans should not exceed 50% of your monthly income.  If a large part of your income goes into EMIs then your other critical financial goals like child’s education or saving for retirement will get affected. Banks always want you to borrow large amounts, but you should borrow only the amount that you can easily repay.

Do not borrow to splurge

You may have all the reasons to take a break and go on a long holiday, your wife may ask for a diamond ring on the silver jubilee anniversary , your teenage daughter may want a designer wardrobe, luxury watches and high end bags; but remember you should wait till you save enough for these expenses. If you borrow to pay for these expenses you will keep paying the EMIs long after the thrill and excitement to splurge has faded away. Remember to live within your means and borrow only if you really need the funds. After all, unsecured  personal loan only provides instant access to funds. It is not free money. It has to be repaid along with interest.

Do not borrow to invest

The golden rule for investing is to never borrow money to invest. The interest that you get on safe investments like fixed deposits will not match with the interest you pay on loan. Equity investments that do offer high returns are risky and volatile. If stock market declines you will not only suffer losses but will be tied up with an EMI obligation as well.

Consider other cheaper alternatives

Since unsecured personal loans are expensive it is always better to explore other cheaper alternatives first in case of cash crunch. Taking loan against assets like gold or fixed deposit may turn out to be a much cheaper option.

 

There are some situations where taking a personal loan is a wise decision

 

Repay a high interest loan

 

If you have a high outstanding credit card balance with an exorbitant interest rate of 28% it is prudent to take a small personal loan at 18% to repay it and reduce your interest outgo substantially.

 

Consolidating debts

 

In case handling several loans and credit card repayments is becoming unmanageable, small personal loan can be used to consolidate all your payments. Though it is only a transfer of debt pile and does not reduce your overall debt, still concentrating on a single loan payment is much easier.

 

Medical emergency

 

If you need money instantly in case of an emergency hospitalization you can rely on personal loans. Fast approvals and quick disbursement of the loan amount will help in arranging for funds in a much shorter time. An online comparison of personal loan interest rates can help in identifying the cheapest option available.

 

Defaulting on the loan can have serious consequences. Late payments or missed EMIs impact your credit report and mess up your CIBIL score. It may also hinder your chances of getting loans in future. So be a disciplined borrower and make sure you make your repayments on time.

 

Personal loans are easily available today. It is a good option if you are looking at consolidating your debt or paying off a high interest loan. But for spending on luxury items it is always better to save first, than pay a high interest on it. Being thoughtful about your own decisions and actions will save you from entering a debt trap.