When you are looking to take a personal loan, two of the key factors that play an important role in lender’s decision to lend to you are:
Personal loans are unsecured loans. This means that lender is giving the borrower money without taking any collateral. So in case of a default by the borrower, lender will have no security that can be sold off to recover outstanding loan amount. And this is the reason why interest rates on personal loans are typically higher than rates on secured loans like home or auto loans.
In unsecured loans, the only thing that the borrower can depend on is your past credit history and your future income potential.
If you have been regular with your EMI payments in past, it will reflect positively in your credit report. A good credit score tells the lenders that the applicant has been regular in clearing his past dues and this can be expected in future too. So the perceived risk of a borrower with good credit score is lower.
So having a good credit score is very important for getting a personal loan at competitive rates. If lenders perceive that you are a high-risk borrower with lower-than-average credit score, they might deny you a loan or offer you a personal loan at very higher interest rates.
Now coming to future income potential. You can only pay off your new loans with future income and not by past credit record. Isn’t it?
This is the reason why importance is given to borrower’s ability to meet future EMI obligations. This is judged basis stability of income and its adequateness given other expenses of the borrower. If lenders feel that borrower will be unable to meet his EMI obligations due to lack of sufficient regular income, they can chose to reject the loan application.
So when you are applying for a personal loan, make sure you have paid heed to these two factors. This will save you from any negative surprises that might spring up in loan processing phase.