TomorrowMakers ™

Financial Planning

How does your employer profile decide your loan eligibility?

27 June 2016
Apart from your credit history and score, your bank also used your employer status to decide your credit worthiness in determining your eligibility for a loan.
 

Easy access to credit has made it possible for people to leverage their future income to make today’s dreams come true. However, the bank which disburses the loan does a thorough check on the ability of the individual to repay the loan. Apart from credit score, an individual’s employer status also plays a role in determining whether the bank accepts the loan application or not.

Role of employer status in calculating loan eligibility

They are of two types of loans, secured and secured. While secured loans are backed up by a collateral (for example, a home loan is backed up by the house), the critical differentiation comes in case of unsecured loans where the bank does not have anything to fall back on in case loan is not paid by the borrower.

Thus, the decision to lend a loan is a weighted one, based on various factors such as income, age, and even the profile of your employer.

How companies are categorised

Banks and other loan-lending financial institutions usually categorise companies into listed and unlisted, and further categorise them based on their risk profile. For some financial institutions, the categories are Super A, Cat A, Cat B, Cat C, Cat D, etc. and for others these are named as Diamond, Platinum, Gold, Silver, etc. Reputed and listed companies such as TCS, Infosys, Accenture etc. are considered creditworthy and placed in the “Cat A” or “Super A” category.

Related: Loans that help you save money

Employees of listed companies can often get:

  • loans at preferential rates (as low as 13-14%)
  • larger loan amounts
  • longer loan-repayment tenures
  • exemption of processing fees, etc.

 even if the salary they earn is as low as Rs. 15,000 (this figure differs for Tier I, II, III, IV cities).  

Also, such employees are top priority for sales agents. In contrast, someone working in an unlisted company might have to pay a rate of interest as high as 17-18%, unless his/her existing credit history/relationship with the bank has been sound enough to warrant a more affordable rate.

For such employees, it is advisable to consider NBFCs when seeking a loan, because NBFCs give much more weight to an individual’s own repayment capacity rather than their employer status.

Related: Types of Loans [Infographics]

Self-employed professionals face issues in getting a loan because income in such businesses is perceived to be less stable than a regular corporate job. Additionally, documentation requirements are far more for self-employed individuals as compared to salaried persons, which adds to the challenge.

Job stability plays a role too

If you’re working in a Super A/Diamond company, you may not have problems getting a loan even if you’ve been in your new job for less than a month, but if your employer profile is not as reputed, this becomes a factor as well. 

Why do banks consider employment status?

Firstly, the stability of employment with smaller enterprises is riskier as they are not as well-established and their capital investment is low. Thus, in case the company were to face financial troubles and close down, employees would be suddenly left without income or the means to pay back their loan.

Secondly, larger companies often have more stabilised HR policies which make it easier to arrange the necessary records and paperwork required to get a personal loan approved.

Conclusion

With the right preparation and documentation, getting financial support when you need it should be extremely easy.

 
 
 

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