In small towns, small businesses depend on unauthorised moneylenders for their financing needs. They charge exorbitant interest and there is normally no clear paperwork for the same. These are risky finance options that can prove dangerous in the long run.

You can use the personal loan for any purpose like a medical emergency, your child’s education expenses, a family vacation, a deposit on a house, investment in an IPO or anything that you want to purchase but not pay all at once.

 You may not want to touch your contingency fund for these expenses. Under such circumstances, a personal loan which is multipurpose in nature is a good option. As it is an all purpose loan you can use it to meet any expense that comes your way.

What are the factors that determine the approval?

In case of self employed individuals, the following factors are taken into consideration before approving a loan:

1. Monthly Income and Annual Income supported by Tax Returns

In the absence of a salary slip, the Income Tax Return is the verified document used to determine the annual income of a self employed individual. In combination with the bank statement, it can accurately establish the consistency of the cash flow.

2. Credit Score

Whether you are self employed or a salaried employee, a good credit score is a must for a personal loan. Since the personal loan is an unsecured loan, it is in the interest of the lender to ensure that the borrower holds a good credit score and satisfy themselves that the borrower is capable of repaying the loan on time. A CIBIL score of around 750 is considered good for a personal loan.

3. Age and Experience

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.

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.

4. Income and Profits

As the disposable income of salaried professional is a factor for the bank to decide in giving a personal loan, your disposable income as a self-employed professional, will help the lender to judge your ability to pay back the loan. After all, only if you can prove that you can repay without defaulting, will a bank consider you as a safe option to release the loan.

Some of you may receive income from the business, while others will take all the profit from it, or vice-versa. In both the incidences, your earnings from the income tax returns will be noted. Few banks could be strict as to mandate at least an amount of INR 5 lakhs as net income required for allowing you to take a personal loan, while some NBFCs or banks could relax the limit to INR 2 lakhs.

5. Number of debts running concurrently 

Reviewing the bank statement helps the lender determine the number of EMIs currently being paid. This information is important to determine the fixed monthly cash outgo. The final amount of loan being approved will be determined by the number of debts being serviced. Ideally not more than 50% of the net salary should be used to pay the EMI.

6. Nature of Business

The kind of business does matter when you need a personal loan as a self-employed professional. Some banks and NBFCs consider this aspect as important in making a decision to grant a loan or not. The lender wants to learn the stability of the business and your source of income.

The lender would definitely need to assess the nature of the business to determine if it is seasonal in nature. Ideally, they would prefer a business that is in operation throughout the year and generates a monthly income that is greater than the admissible threshold of Rs 30,000 on a monthly basis.

7. 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.

8. Repayment Capacity

Finally, it boils down to repayment capacity. The lender needs to be completely satisfied that the borrower will be able to meet the monthly EMI commitment. After all, the lender must ensure that the borrower is capable of making the repayments on time. The lender may ask for supporting documents to establish that the cash flow is regular and consistent and the EMI is reasonable enough and not beyond the borrower’s capacity keeping in mind the other expenses and debts.

9. 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.

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