Personal loans are noted for their flexibility. You can use the funds for a variety of purposes such as a wedding, business expansion, vacation, and so on. The lender does not impose any restrictions on its use, nor do they inquire as to why you are applying for a loan. But before you proceed with your application, you should be aware of the list of personal loan documents required.
Personal Loan Documents Required at the time of Submitting Application
Personal loans are well-known for their quick approval and disbursement. Given this, all financial institutions have simplified their documentation process. Here is the list of personal loan documents required for getting quick approval.
- Identity Proof: You can submit a copy of your PAN card, Aadhar card, or driving licence here.
- Address Proof: A copy of your Aadhar card, a lease agreement, or a utility bill will suffice.
- Income Proof: For income proof, check with your lender to see what documents they accept. Lenders typically request the most recent bank account statement, ITR, salary slips, form 16, or salary certificate. The proof of income for the business and salaried workers differs.
- Employment Proof: If you are a salaried employee, you must provide an appointment letter as well as a relieving letter as proof of work experience. Self-employed individuals must provide proof of business existence, such as a business registration certificate, a service tax registration certificate, and so on.
Why do lenders ask for different types of documents before approving a personal loan?
1. Income:
Personal loan documents are required for assessing your monthly income. The lender will ask for documents such as salary slips, salary certificates, income tax returns, form 16, or a business current account statement to evaluate whether your monthly income is sufficient to cover the EMIs or not.
Assume your monthly income is Rs 25,000. You apply for a personal loan, and the EMI based on your profile is around Rs 17,000 per month. Do you believe you will be granted a loan? Perhaps not. The reason is your debt coverage ratio is extremely low.
2. Debt-to-income ratio:
When you apply for a personal loan, your lender will conduct a hard inquiry with the credit bureau. They do so in order to obtain detailed information about your credit profile. The credit report by the credit agency includes information on previous defaults, EMI skips, loan settlements, ongoing debts, moratoriums, and a few more. The lender will then use your income proof to calculate your debt-to-income ratio. This figure is calculated by dividing the total EMI by your gross monthly income. If the ratio exceeds 60, you will be denied funding.
Even if your monthly income is Rs 1 lakh and no previous EMI skips or defaults, your lender may reject your loan application. A low DTI could be the culprit here.
3. Employment Status
Another vital factor that the lender considers when approving a personal loan is employment status. If you have a tendency to switch jobs frequently, your lender may refuse you a loan.
Regular job switching reflects dissatisfaction for reasons such as low income, uncertainty about retention, and so on. It reflects that even if you are currently employed, your career is unstable, and there is a high possibility of you being out of work for an extended period of time in the future while delaying your personal loan EMI.
Typically, financial institutions require applicants to have one year of work experience, with at least six months of continuous work experience in the current organization. In order to confirm your experience, the lender will request an appointment or joining letter from your current employer and a relieving certificate from your previous employers.
4. Employer’s Reputation
Your repayment potential is directly related to the employer’s reputation. For example, if you work for a sole proprietorship or a startup in its early stages, the uncertainty about your retention as an employee is always present. There have also been numerous complaints about small businesses or shops failing to pay their employees on time. If you work for such a company, your default risk is significantly higher, and you may be denied a loan as well.
Personal loan approval chances are significantly higher if you work for a public sector unit or a multinational corporation. Again, to determine your employer’s credibility, the lender will request you to furnish the last six months’ salary slips or a bank account statement for the previous few months.
5. Credit Utilisation
You might have several credit cards in your wallet, each with a high credit limit. However, you are jeopardizing your credit score if you rely so heavily on your card that the available limit is completely depleted each month.
You may be unaware that credit cards account for approximately 30% of your credit score. If you use more than 30% of your revolving credit limit on a regular basis, you will be considered an indisciplined borrower with a poor budget management approach.
The lender determines your credit utilization rate with the help of your credit report. Also, in order to avoid becoming indebted, keep track of your credit card expenses.
6. Credit Mix
Credit mix refers to a debt portfolio that includes both secured and unsecured loans. Your credit mix accounts for 10% of your total credit score. If you want to get a personal loan in the future while improving your creditworthiness, try to keep a balanced debt portfolio with half of your debt secured and half unsecured. The lender determines your credit mix by reviewing your credit report.
However, if you are a first-time borrower, it is best to start with a short-term consumer durable loan. Check that you are repaying the EMI on time. This will improve your credit score and allow you to qualify for a reasonable personal loan amount.
To conclude
Every financial institution has its own set of eligibility requirements. Each lender’s credit appraisal method also varies slightly. Some prioritize your credit score, while others prioritize your monthly income. However, when it comes to personal loan documents required, they are the same across lenders. The lender will require you to submit income proof, recent photographs, address proof, and income evidence when applying for this loan. The lender will assess your repayment potential after you submit the document, and if found satisfactory, the funds will be disbursed to your account within 24 to 48 hours.
