Personal loans can be a quick way to get a much-needed cash infusion, which can be used to fund your home renovation, emergency medical bills, start a business venture, or even take a holiday. However, getting a personal loan from a bank involves the critical step of customer verification, which determines the end result of your loan application.

Unlike a mortgage or a car loan, personal loans aren’t usually secured by any collateral, which is the main reason that lenders have to follow strict eligibility criteria before approving them. Lenders look at your credit score, income, ongoing EMI’s, occupation, age, and repayment history, which evaluating an application for a personal loan

Let’s take a closer look at the different factors that are considered by banks when scrutinising personal loan applications from borrowers:

Important Factors Considered By Banks Before Lending Money To Self-Employed Individuals And Business Owners

  1. Capacity
  2. Collateral
  3. Capital
  4. Character
  5. Conditions
  6. Age
  7. Experience
  8. Loan Amount and Repayment Period

A business loan can help you expand your business and take it to new heights of success. Banks are usually extra cautious while giving loans to self-employed people or business owners, so you need to share your business plan with the bank and show that you have a strong track record of managing a business.

Banks will hesitate to give loans to people who are in a desperate situation (like high-debt), and thus, it becomes important to be specific about your loan requirement and repayment plan. Banks usually look at the 5 C’s of credit i.e., capacity, collateral, capital, character, and conditions while evaluating your personal loan application.


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  • Capacity

The bank will check your repayment capacity before everything else. While applying for a loan, the borrower has to give a letter to the bank, authorising them to run your credit history. Banks will evaluate your repayment history with others and the amount of debt you have currently. The bank then reviews your income and calculates your debt service coverage ratio. A bank usually wants a minimum debt service coverage ratio of 1.20 times.

  • Collateral

Sometimes a bank may require collateral or security from the applicant to cover its risk. Even the strongest businesses can sometimes see a period of decline due to unforeseen circumstances which could inhibit a business’s ability to repay a loan. The type of collateral that a bank can ask for depends on the available assets; like, properties, business assets, pieces of equipment, vehicles, and current account savings, FDs, etc.

Borrowers may need to authorize the bank to place a lien on whatever assets you pledge as collateral at the time of loan approval. In case you are unable to repay the loan, then the bank’s lien can give it the right to take control and sell those assets to recover its losses.

  • Capital

Banks will review your financial history and record, and also evaluate your company’s capital, which is the amount of money the company has to work with. In case the bank finds that the company is not well-capitalized, it can decline the loan application as it may consider the same to be high-risk. Banks will also check how much capital you’ve invested in your business, as it shows how vested you are in your business’s success. In case, the bank finds that your personal financial position is significantly stronger than the company, it could still approve the loan if you give a personal guarantee.

  • Character

A lender will also do a thorough check of your company’s history, your references as well as the reputation of your organisation before approving your loan application. If you and your business have an impeccable credit history, as well as a good reputation and reliable references, the chances of approval of your personal loan become significantly higher. In case your company has a history of non-payment of debt or a bad reputation, banks may hesitate to offer you a loan even if you can meet the other conditions.

  • Conditions

Another important thing that a bank looks at is the condition of the economic climate in your industry, over which you may not have a lot of control. Even if your organisation can meet the capacity and collateral requisites, but if you operate in a high-risk industry, then a bank may choose to reject your loan application.  One of the reasons behind this is that the industry could be at the risk of a sudden downturn, putting the bank’s loan at risk. In order to make sure that your loan gets approved, you must overcome tough economic conditions as well as demonstrate an ability to withstand high expertise in running a volatile business. 

  • Age

In addition to the factors mentioned above, banks also consider your age while evaluating a loan application. Banks prefer giving loans to people in the age group of 30-50 years as they are considered financially stable. People in this age group have worked for a few years and still have several years left to repay the personal loan easily. People who are above 60 years of age may find it challenging to secure a personal loan and may have to provide collateral before banks approve their loan application.

  • Experience

A critical factor that banks consider is an experience. For, e.g., a person with 15 years of experience will be given preference over some who are just starting out or has only 2-3 years of experience. Banks also prefer borrowers who have been serving in the same industry for a few years while considering the loan application. In case a person has a record of shifting professions rapidly, then a bank may not approve their loan easily.

  • Loan Amount and Repayment Period

In addition to the loan amount, banks also take into consideration the repayment period. They usually prefer applicants who choose a shorter repayment period. For, e.g., a person who applies for a loan repayment period of 2-3 years, will be given preference over those who have asked for a longer repayment period of 10 years, and so on. 

Important Factors Considered By Banks Before Lending Money To Salaried Professionals

  1. Credit Score
  2. Current Income
  3. Employment History
  4. Occupation
  5. Repayment History
  6. Amount of Loan
  7. Purpose of the Loan
  8. Surplus Income


Personal Loan App


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  • Credit Score

The first thing that a lender looks at while evaluating an application for a personal loan for a salaried professional, is the credit score. A good credit score, i.e., above 700, can help you get loans at a cheaper rate of interest as well. The credit score reflects your financial history and your ability to pay off the loan. The score is compiled from information gathered regarding the types of loans you are currently paying off or have successfully paid off in the past.

The amount of debt you have accrued, what has been your track record for paying off your loans, how frequently you repaid credit card debt, how many EMIs were missed – all these factors impact the credit score.

  • Current Income

Banks also look at other factors like your current source of income as well as your monthly expenses. Bank officials will also look at how much debt you have, which includes your existing home loan, auto loan, monthly bills, etc before granting you another loan. Lenders will check your debt to income ratio that is your total monthly debt payments divided by your gross monthly income. Ideally, your total debt should be less than 50% of your income. 

  • Employment History

Employment history is also taken into account as proof of income and stability. Lenders establish proof of ongoing income before approving loans, and applicants who change their jobs frequently or have no stable source of income are considered risky borrowers. A healthy employment history means that you have been working in the same line of work and have been employed consistently. However, this doesn’t mean that you have to have worked with the same company over the years. Self-employed people usually undergo more scrutiny than salaried people with stable monthly income.

  • Occupation

Occupation also plays a crucial role in your loan application. There are some occupations that banks may prefer, like government banks, government employees, and PSU employees. After that, banks prefer people working with blue-chip companies, as well as other stable professionals like doctors, chartered accountants, engineers, and lawyers.  

Applicants who are self-employed or in a private company usually get the lowest priority. If a person works in a company that has a poor record of paying salaries to its employees, then the loan application is considered weak. Similarly, an applicant who is known for switching jobs frequently also creates a negative impression. However, banks treat all applications equally, whether it is of a government or a private sector employee.

  • Repayment History

Banks also look closely at the credit and loan repayment history of the borrower. Any unpaid debts can continue to linger on for up to 7 years; thus, affecting your credit score as well as your loan eligibility. If you have a poor loan repayment history or have unpaid debts then banks may hesitate to approve your personal loan application.

  • Amount of Loan

An important factor that banks look into is the amount of credit that the borrower has applied for. A higher loan amount will lead to greater scrutiny by the bank, and it may ask for collateral to hedge its risk as well. On the other hand, a smaller loan application could be approved more quickly based on your relationship with the bank. Banks will consider also consider your complete financial history, repayment capability, etc. before accepting your loan amount.

  • Purpose of the Loan

The bank will also ask you to disclose the purpose of the personal loan. If it is a high-risk loan (like starting a new business with no experience) then banks may reject your application, charge a higher rate of interest or even ask for collateral. In case the loan amount is for low-risk purposes, like renovations and repair to your home or construction of a house, then you may get it approved easily.

  • Surplus Income

Banks will check all your ongoing EMIs and existing debt that you are paying off each month. In case, you have a considerable surplus income left over after paying your EMIs, getting the approval for a personal loan will be easier. Low surplus money conveys to the bank that you are already stretched beyond your capacity and are at a higher risk of default. While applying for a personal loan you must consider the surplus amount you have left with each month as well as your ability to make EMI payments.

Personal loan eligibility is determined by several critical factors. You need to keep all the points mentioned above in mind to improve your chances of getting a personal loan at a lower rate of interest. Apart from these, banks also consider the length of the relationship the applicant has had with their institution. If you have maintained a good reputation with your bank and maintained a healthy bank balance, chances of your loan getting approved become higher. Once you secure your loan, make sure to make your payments on time, so the next time that you decide to apply for a loan, your b will approve it readily.

If you are looking for an instant personal low with minimal documentation and formalities, there are several alternatives to banks as well. PaySense is a financial lender that offers online personal loans up to Rs. 5,00,000 without any collateral or a high credit score. If you are a self-employed individual, you must earn a minimum of Rs. 15,000 and if you are a salaried professional, you must have a monthly income of Rs. 12,000. Plus, you must be a citizen and resident of India, in addition to being between 21 years and 60 years of age and have an active bank account.

PaySense offers its services in more than 40 Indian cities and allows its customers to choose their own repayment schedule as well. The best part, however, is that you can apply for a loan using the PaySense mobile app and get an approval for your loan application on the same day itself! To know more about personal loans from PaySense and determine your credit line, get the PaySense app from Google Play Store today.

Shivam Abrol

Shivam is a passionate content writer with Masters in journalism. A mutiple-award-winning writer, he brings over a decade of experience as a BFSI writer. In fact, he himself is known in his circle for sound financial advice. A writer by day and a reader by night, Shivam enjoys researching and writing on various financial topics, including credit, stock market, crypto, taxes etc. When he is not spending his time penning down an informative article or opinion, he can be found playing with his kids or collecting stamps.

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