When your financial circumstances become challenging or you need to help to invest in your child’s education is when your eligibility for a personal loan becomes very important. So you’ve submitted all the necessary documents to the bank for that personal loan and now waiting for the approval. Ever wondered what goes on behind the scenes of your loan approval process? Other than setting minimum salary requirements and matching your employer to its “approved company” list, how does a bank decide that you are worthy of walking away with its cold, hard cash?

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Before putting an approval stamp on your application, a bank will put you through several credit and background checks to safeguard itself. Are you salaried or self-employed? Are you on probation or are you a confirmed employee? How long have you been working for your current employer? What is your current debt-to-burden ratio? Do you have any debt with other banks? As a business owner, how long have you been in business? Banks also look at things like how long you have been in the UAE and how frequently you have changed jobs to give them a clue about how stable your situation is.

These are the primary factors that banks consider when approving or rejecting your personal loans application:

Are your employed or do you work for yourself?

Banks need assurance that you have stable and adequate income to repay your debts. Banks are happier to lend to salaried individuals as there is less risk of income fluctuation, which impacts ability to repay. The loan amount that will be approved is proportional to your salary. Banks have a limit such as three, four or five multiples of your salary for example.  On the other hand, there are 15 loans currently being offered in the UAE catering for Self employed

Whether or not your salary is being transferred to bank

Most banks require applicants’ salaries to be transferred into an account with the same bank. This gives the bank security that your income is going to them from which they can automatically deduct the monthly loan installments when your salary is credited into your account. In case you leave your job or lose it, the bank can put a freeze on your end of service benefits so that this may be used to cover for the remaining loan.

Your Debt Burden Ratio – how much are you already paying in debts?

Banks are wary of lending to individuals who have taken on too much debt. In fact, the UAE Central Bank has stipulated that your total equal monthly installments (EMIs) from existing loans must not cross 50% of your monthly salary. This ratio is called the Debt Servicing Ratio (DSR) or Debt Burden Ratio (DBR). In such case your application may be rejected or if your DSR is high but less than 50%, banks may lend at higher costs.  Your debt burden ratio is calculated by adding up all your monthly repayments on your loans and 5% of your total credit limit on all your credit cards.

[Related: How to read your Al Etihad Credit Bureau Report | How can you save on comparing your loan?]

If your company is listed (approved) with the bank

Banks are more relaxed to lend to individuals who work in listed companies. Listed companies are those that have submitted their financial results to the banks. Steady profits assure banks that employees are guaranteed to receive their salaries and in turn repay loans.  If you want your company to be listed with a certain bank, you should contact the bank and provide them with your HR contact.  IT

How long you have been in your current employment

Banks may not lend to you if they feel that your job is not guaranteed. Most companies have a 6 months probation period and therefore there is the risk of loosing your job with no notice period.  Based on this, most banks would only lend if you have held your current job for minimum six months. They would ask your for a salary certificate and often do a reference check with your employer.

Your credit history and rating

Your past behavior is critical when it comes to approving you for another loan in the future.  Banks unlike a few years ago, have the ability to check your credit history from the Credit Bureau – that is they can see all the loans and credit cards you have currently, they can calculate your DBR and more importantly can see whether you have any missed payments on your debts.  Based on this, they will decide whether to approve you, decline you or provide you a loan at a higher rate.  You can have a look at your own credit report from the Al Etihad Credit Bureau and it costs AED 100.