A personal loan is often necessary to meet big expenses like buying a car, home renovation, paying for higher education, wedding expenses, medical emergencies, etc. While getting a personal loan is easier nowadays, your eligibility and interest rate depend greatly on your income stability and credit score. This is where having a salary account can help you get a personal loan more easily and on better terms.
This blog will discuss the benefits of having a salary account when applying for a personal loan.
What is a Salary Account?
A salary account is a type of bank account specifically designed for individuals who receive their salaries through direct deposits. This account can play a significant role in facilitating the approval process for personal loans.
Some key features of salary accounts are:
- Zero balance account. No minimum balance requirements
- Free unlimited transactions on ATM withdrawals, online transfers, etc.
- Free debit card, chequebook and net banking access
- Higher interest rate on savings compared to regular savings accounts
- Various discounts or benefits on bank products
So, a salary account offers various benefits and privileges compared to a regular savings account. Your employer directly credits your monthly salary into this account on a fixed date.
Why do Banks Prefer Salary Account Holders for Personal Loans?
When you apply for a personal loan, banks and NBFCs evaluate your profile based on factors such as income, employment stability, credit score, repayment capacity, and existing loans.
Here are some key reasons why having a salary account works in your favour while seeking a personal loan:
- Proof of income: Salary account statements act as proof of regular income for financial institutions to verify your repayment capacity. Your salary credits reflect your monthly income.
- Employment stability: A salary account indicates that you are employed with a company. This employment stability improves your creditworthiness for a loan.
- Creditworthiness: Financial institutions evaluate your credit behaviour based on your salary account activity and transactions. This helps build your credit score over time.
- Repayment track record: Repaying previous loans on time via regular EMIs from your salary account improves your credit score and loan eligibility.
- Longer relationship: Salary account holders tend to stay longer with a bank. This longer relationship improves your creditworthiness when applying for a loan with the same bank.
- Compliant KYC: Salary accounts require full KYC compliance. This saves time when KYC verification for loans is performed.
Based on these parameters, banks find salary account customers more eligible and credible for personal loans.
Let's look at some key benefits in detail:
1. Better Eligibility and Higher Loan Amount
Financial institutions often pre-approve or offer higher loan eligibility to existing salary account holders. Some benefits include:
- Loan amount typically up to 5 times your monthly net take-home pay.
- Flexibility to apply without income documents in some cases.
- Accommodating irregular income credits like bonuses, commissions, etc.
Banks have internal lending policies that favour salaried applicants. For instance, some banks may approve a personal loan up to 60-80 times the monthly salary credited over the last six months. This gives salary account customers an edge.
2. Lower Interest Rates on Personal Loans
Interest rates directly impact EMIs and total repayment costs. Salary account holders may qualify for lower interest rates on personal loans at some banks.
Banks compete to offer lower rates to their own salary account holders to retain them. As a valued customer, you can negotiate better based on your relationship history.
Besides standard rates, you can avail of special promotional offers for salary account holders. Maintaining a salary account can reduce your overall interest cost on a personal loan.
3. Faster Processing and Access to Pre-approved Offers
Banks process salary account holders' loan applications faster due to readily available income documents. Also, KYC formalities are easier.
Further, you may receive pre-approved loan offers at attractive rates based on your account activity and credit score. You can simply accept the offer and get approval quicker based on minimal documentation.
4. Building Credit Score with Salary Account
A long-standing salary account helps demonstrate financial discipline, which contributes to your credit score:
- Timely payment of credit card bills from your account shows repayment discipline.
- No missed EMIs on existing loans reflect positively.
- The higher average balance in the account indicates a savings habit.
- Limited instances of failed auto-debit instructions or cheque bounces denote better money management.
Thus, careful usage of your salary account reflects creditworthiness, helping you qualify for cheaper loan rates. You may also receive a higher loan amount.
Conclusion
A salary account has many advantages when you apply for a personal loan from a financial institution. It reflects your regular income, employment stability and good credit behavior over time.
Financial institutions may approve your personal loan faster and offer a higher loan amount and lower interest rates. Also, you may receive pre-approved loan offers basis your salary account relationship.
