Availing a Personal Loan: Eligibility for Salaried Employees vs. Self-employed Individuals

Whenever one is confronted with an unexpected financial emergency, they always go for an option that gives them the most liquidity in the fastest period of time. It doesn’t matter, then, if they draw a monthly salary or have their own business; when someone is in urgent need of cash, he/she looks for the best source of funds available to meet their requirements. Banks, as well as Non-Banking Financial Companies (NBFCs), offer a variety of options to help meet a cash shortfall or cover a temporary cash expense. This can range from short and medium-term instruments as well as Secured and Unsecured loans. Secured Loans are those loans that require collateral of some sort (like property or gold), and Unsecured Loans don’t require any. An example of such an unsecured loan is a Personal Loan.

A Personal Loan is provided by banks and other financial institutions for working salaried professionals for their personal use. Since they don’t require any collateral or security, Personal Loans are used for a variety of purposes, like planning a holiday/trip, taking care of repairs/renovation of any kind, paying off various bills, to financing events like a birthday/wedding celebration. In case one has an immediate, unavoidable expense that he/she has to take care of, but lacks the funds for it, a Personal Loan is their best bet. If one meets the eligibility criteria and has all their documentation in place (which is super-minimal, by the way), his/her loan will be processed faster and in a simpler manner.

However, Personal Online Loans also come with relatively higher rates of interest, and applying for one can get tricky based on one’s occupation. Since banks do not monitor how a customer uses a Personal Loan, they are a very flexible source of funds. Does that mean that a self-employed individual (who is the proprietor of his/her business) has a disadvantage over a salaried employee because the latter draws a monthly salary? Not quite. Even a salaried professional is checked against various parameters (monthly income, repayment capacity, credit history and employment history) to ascertain their eligibility for a Personal Loan and the interest rate that will be levied on the same.

Here’s how the basic eligibility criteria required while applying for a personal Loan varies in both cases:

1. Age: While the minimum and maximum age limits vary from bank to bank, they are usually lower for salaried professionals than self-employed individuals. For example, a salaried individual need be only 21-23 years to avail a Personal Loan, while a self-employed person needs to have completed at least 28 years of age.
2. Monthly Income: Given the fact that Personal Loans are unsecured, there is no way for the lender to cover their risk except for charging a high interest rate. This, coupled with the uncertainty that a business brings (in terms of stability and generation of income), most banks obviously ask for a minimum monthly income. While the average limit for salaried employees is ₹25,000 some banks even ask for a minimum annual turnover of ₹15 Lakhs for self-employed professionals.
3. Documentation: We all know that Personal Loans are known for having minimal documentation. But that does not exempt self-employed individuals from having to present a range of documents in order to avail a Personal Loan. This includes bank statements, IT returns (as proof of business), as well as a Balance Sheet and Computation of Income certified by a chartered accountant. Salaried employees, by comparison, have it easier, because their set of document is much easier to arrange for.
4. Other criteria: Self-employed individuals also may have to satisfy additional criteria to get a Personal Loan, which is set by the bank (this may vary depending on the bank). This may include having being in business for a minimum number of years, as well as being a customer of the bank.

In conclusion, it may seem from the above points that self-employed individuals have it tougher than salaried employees while applying for a Personal Loan. However, it is important to note that they are an incredibly flexible and liquid source of funds and that banks and financial institutions are only trying to be stringent in terms loan approval so as to cover their risk in case of a default.