HomeFinanceWhat does a bank look for while approving a personal loan?

What does a bank look for while approving a personal loan?

A personal loan comes to your rescue when you need financial assistance or need to make a big purchase. The chances of getting your personal loan application approved depend upon your documentation. Banks or financial institutions would not just check your income but also several other factors before approving or rejecting a personal loan application. 

Things banks check while approving a Personal Loan

Income 

This is the most basic factor banks check when they receive a personal loan. Not just banks, even the loan applicant needs to apply for a loan only if their income is eligible for the product they are applying for. Applying for a loan product that expects a high salary range and getting rejected in the first step itself will have a negative impact on the credit report. 

Banks or financial institutions lend money only if you have an income that allows you to pay the monthly instalment after fulfilling your cost of living requirements. This is applicable to both salaried and self-employed individuals. 

Check: How to close a Personal Loan in the UAE

Debt Burden Ratio 

More than getting a loan approved, repaying it without any major defaults is important. Banks or financial institutes check the repaying capacity of the loan applicant. That is the first and foremost factor that will be reviewed by the banks. They run a review on the loan applicant’s profile and get the details of existing debts, expenses and income. They calculate the Debt Burden Ratio and approve the loan only if the DBR is 50% or less than that preferably.   

If your existing debt payments take away more than 50% of your monthly income, then the lender might turn down your application as adding another loan might increase your debt payments monthly making it hard for a living. 

Credit History 

Credit history and credit score play an essential role in the case of unsecured loans like Personal Loan. While running the review on the existing debts and income sources, lenders also check the previous debts (if any). They check the number of debts taken previously, time taken to clear the debt along with the defaults in the payments, etc. All this information is used to give a score which is well-known as a credit score. Based on the credit history and income, a credit score is predicted which makes it easy for the lender to know if you handle the debts rightly without making it hard on the banks.  

In the UAE, the credit score from AECB ranges from 300 to 900 where a good credit score required to get a loan is 700 and above. Any score below 400 is not accepted by the banks as they consider it a potential risk concerning repayment.  

In some cases, if your previous or existing debts payment history has fewer defaults with an average credit score, then the lender might charge a higher interest rate on the personal loan.   

Not just the previous or existing loans, a credit report also lists down the number of applications made by the applicant along with the loan status. If the loans are rejected, this might have a small impact on the credit score. 

Employment Details 

Not just the income and credit history, banks also check the employment company just to ensure if you have a regular income that would go default which would, in turn, affect the loan payment. Hence in the UAE, it is mandatory to have your employer listed on the bank’s database. 

Along with the employer, even the history of employment is considered. Changing companies frequently with no income stability might be taken as a risky profile. However, this doesn’t mean you have to stay in a company for years together. But shifting 2-3 companies in a year might not sound good on the application. 

This might be different for self-employed individuals. They need to provide solid income proofs along with company income details. Both salaried and self-employed individuals need to provide the latest 3-6 months bank statements where they get their monthly income/ salary transferred as proof of income.     

Age 

The age of the loan applicant is also a mandatory factor. An applicant of 30 – 50 years with stable employment or source of income is considered safe to lend that the applicant as they have ample time to repay the loan with fewer defaults than a person nearing retirement age that is close to 60. 

Apart from these important factors, some banks may also ask for the purpose of the loan but the reason is not a considerable factor for the loan as it is a personal loan. A personal loan applicant undergoes more scrutiny compared to other loan applicants is because there is no collateral on the loan. A personal loan is just provided on the basis of the applicant’s income and debt management history. 

About the author

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Nikitha is a Senior Analyst at MyMoneySouq.com. She has been writing about personal finance, credit cards, mortgage, and other personal finance products in the UAE. Her work on Mortgage loans has been featured by the GulfNews and other popular Financial Blogs in the UAE.

Nikhita
Nikhitahttps://www.mymoneysouq.com
Nikitha is a Senior Analyst at MyMoneySouq.com. She has been writing about personal finance, credit cards, mortgage, and other personal finance products in the UAE. Her work on Mortgage loans has been featured by the GulfNews and other popular Financial Blogs in the UAE.

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