Personal Loan for Salaried vs Self-employed Individuals: Know the Difference

However, since personal loans are easy to avail for salaried individuals, it is a general belief that these loans are only offered to salaried individuals; this could be the biggest myth about personal loans. Many banks and NBFCs offer personal loans to salaried as well as self-employed individuals, provided they fulfil the lender's eligibility criteria.

This article explains the difference between personal loans for salaried vs self-employed individuals.

Personal Loan for Salaried Individuals:

When we talk of personal loans, we generally refer to personal loans for salaried individuals. Banks and NBFCs tend to favour extending personal loans to salaried individuals who receive a regular salary because they have a more predictable and stable income.

Among these salaried applicants, those working in government, public sector undertakings (PSUs), and leading multinational companies (MNCs) are the most sought-after due to their strong job security. Moreover, to attract these salaried individuals, many lenders offer special interest rates.

When determining personal loan interest rates for salaried applicants, various factors are taken into account, such as age, salary, occupation, credit history, and more. Certain lenders also provide pre-approved and instant personal loans to eligible salary account holders.

What Are the Eligibility Criteria for Personal Loans for Salaried Individuals?

Different banks and NBFCs have different criteria for Personal Loans. However, there are common eligibility criteria that most lenders follow:

• An applicant should be an Indian resident (non-residents can apply for NRI Personal Loans).

• Should be at least 21 years of age at the time of loan application.

• The minimum net monthly income should be at least Rs 15,000 to 20,000.

• Should have a good credit score.

• Could be working in a private or public company or central, state, and local bodies.

• Minimum work experience of six months to two years. Some lenders require you to be in the current organisation for at least from last one year.

• Minimum one year of stay at the current residence.

Personal Loan for Self-employed Individuals:

Contrary to popular belief, self-employed individuals can also opt for a personal loan. In fact, depending upon their eligibility, self-employed individuals can avail of a higher amount of personal loan compared to salaried individuals.

Entrepreneurs, small business owners, and self-employed professionals like doctors, lawyers, and charted accountants can get personal loans for self-employed. This loan is also called a business loan.

As a business owner or self-employed professional, you may frequently require funds to grow your business, buy raw materials, expand the office, or even embark on a business trip or a personal vacation. During such situations, you can avail of personal loans from various lenders to meet your immediate financial requirements.

Although banks typically favour salaried individuals due to their consistent monthly income, self-employed individuals can also opt for these loans relatively easily by demonstrating their repayment capability through income documentation and business development records.

Some banks offer flexible loan repayment facilities based on the borrower's business expansion and financial capacity. Some lenders also offer personal loans in the form of overdraft facilities, allowing self-employed individuals to choose repayment as per their financial convenience.

What Are the Eligibility Criteria for Personal Loans for Self-employed Individuals?

• An applicant should be an Indian resident.

• Some lenders have higher minimum and maximum age criteria for personal loans for self-employed individuals, but they typically range between 23 to 65 years.

• You must provide proof of income through tax returns, a profit and loss statement, and six months' worth of bank statements, as well as your IT returns.

• Proof of your profession, which may include your company or business registration.

• There is a minimum income threshold, and this requirement can differ from one bank to another. It typically required a minimum monthly income of Rs 25,000.

• Your business should have been in operation for a certain number of years, which also varies among lenders. While some may ask for a minimum of one year, others may require a minimum of 2 to 3 years of existence.

Here Are the Key Differences Between Personal Loans for Salaried vs Self-employed Individuals:

1. Eligibility Criteria and Documentation:

Eligibility requirements can vary from one lender to another, but there are some common criteria that apply to all applicants.

Regardless of whether you are a salaried or self-employed individual, you will need to provide KYC documentation. While specific documents may differ among lenders, they typically conduct a KYC check. It includes a photograph of the applicant, identity proof such as a PAN Card, AADHAR Card, Passport, etc., and address proof such as an AADHAR Card, Passport, Voter ID, Driving License, etc.

In terms of age limits, lenders typically set a lower minimum and maximum age for salaried applicants and a higher minimum and maximum age for self-employed individuals. Banks usually offer personal loans to salaried individuals from the age of 21 to 60, whereas self-employed individuals are typically eligible from the age of 23 to 65.

The minimum income requirement is typically higher for self-employed individuals in comparison to salaried applicants. Lenders may ask for a minimum of 6 to 24 months of work experience for salaried individuals and 12 to 36 months for self-employed applicants.

As discussed, the minimum income criteria for salaried individuals are lower than that of self-employed individuals. Salaried individuals typically require a minimum monthly salary of Rs 15,000 to Rs 20,000, whereas self-employed individuals need a minimum of Rs 25,000 net monthly income.

Regarding the documentation needed for application assessment, both salaried and self-employed applicants must provide certain documents. For salaried individuals, the required documents include:

• - Appointment letter

• - Last 3 months' salary slips

• - Six months bank statements

• - Latest ITR or Form 16

On the other hand, self-employed individuals need to provide the following documents:

• - Proof of business registration

• - Profit and loss statement

• - ITR documents for the last year

• - The last 6 months' bank statements

• - Tax audits, leases, or other agreements, if any.

2. Interest Rates:

Due to the higher risk associated with self-employed applicants, lenders typically charge them higher interest rates. Lenders perceive salaried applicants as the more reliable borrowers because their consistent monthly income reduces the risk of EMI defaults.

Nevertheless, this doesn't imply that self-employed applicants cannot secure favourable rates. It is feasible if they show a stable income and have a good credit score.

3. Loan Amount:

The approved personal loan amount depends on income and credit score. Typically, salaried individuals find it easier to meet the personal loan eligibility criteria. Nevertheless, some lenders do extend larger loan amounts to self-employed individuals who qualify and provide proof of their income.

This is because salaried individuals typically rely on a single income source. Whereas self-employed individuals have more income potential and can shoulder additional responsibility, given that their business is profitable.

You can use our Personal Loan EMI Calculator to calculate the personal loan amount you should opt for.

What are the Same Features of the Personal Loan for Salaried and Self-employed Individuals?

Now that you know the differences between personal loans for salaried and self-employed individuals, it is also necessary to understand the same features these two types of loans share:

1. No Collateral:

Banks do not require borrowers to provide any assets or collateral as a guarantee when granting personal loans for salaried or self-employed. This means that personal loans are unsecured, and borrowers don't have to risk their property to obtain them.

2. Hassle-free Process:

Opting for a personal loan involves minimal documentation and proof requirements, such as KYC documents and income proof. This streamlined process makes it more convenient for borrowers to apply for and secure personal loans.

3. Instant Loan Approval and Disbursement:

Irrespective of whether it is for salaried or self-employed individuals, personal loans are typically approved quickly, especially when applied online, thanks to simplified documentation and streamlined processes, making them an accessible option for borrowers in need of quick financial assistance.

4. Flexible Repayment Tenure:

Some banks offer flexible repayment periods, considering the growth and financial stability of the borrower's business. Moreover, some lenders allow borrowers to repay the loan once they have extra funds, providing flexibility in managing the loan repayment.

To conclude:

Banks and financial institutions extend personal loans to both salaried and self-employed individuals, provided they meet the necessary eligibility requirements. A good credit history significantly improves the speed of loan approvals, regardless of one's employment status. While factors like income, age, business stability, work experience, etc. are crucial in the loan approval process, a key consideration for banks is the individual's capacity to repay the loan, which is determined based on their credit history and responsible financial behaviour.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

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