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Reasons why Bank Statement is an important document required for availing a personal loan

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When you apply for a personal loan, lenders will ask for several documents as part of the application procedure. This is known as KYC, or “Know Your Customer” and is an important feature to know about when taking a loan, as it can have a high impact on your chances of approval.


The Reserve Bank of India first introduced KYC in 2002. It is a basic formality procedure that necessitates a customer to submit certain identification details for verification purposes. The main objective of KYC is to verify a potential customer’s identity and prevent individuals from operating under false or stolen identities. Hence, KYC helps to reduce the chances of financial frauds and curb illegal activities.

KYC is commonly used by banks, lenders, and non-banking financial institutions (NBFCs). If you’ve ever used Paytm, you’ll know that they have a KYC process that customers must mandatorily complete in order to use their services. Some of the common KYC documents required include PAN card, Aadhar card, passport, driver’s license, etc.

When it comes to taking a personal loan, the potential borrower will need to submit several KYC proofs that validate their identity, residence, and income.

One of the common and mandatory income proofs that every bank or lender will ask for is your bank statement.

A borrower’s bank statement gives the lender an overview of the former’s financial situation. In the bank statement, there is an entire record of all deposits, withdrawals, and overdrafts helps the lender to verify the borrower’s income as well as their outgoing and debts. Since 3 to 6 months’ bank statements are required, the lender can assess the applicant’s level of default risk. This makes the bank statements one of the most important KYC documents required for availing a personal loan.

It is highly important that individuals submit their bank statements without any modifications. Sometimes, applicants falsify bank statements making changes to their income, etc. thinking that this will increase their chances of getting a loan. Never, ever attempt this! Banks and lending institutions have highly sophisticated systems that will detect any such fraudulence and as a result, will reject the borrower’s application immediately.

Here is what a lender assesses from an applicant’s bank statement:

1)      Monthly Income

When you apply for a personal loan, you have to submit your income details in the application form. Along with the form, you need to submit your bank statement. From this, the lender can confirm whether the income is being credited to your account, as well as whether the income amount you’ve mentioned is indeed true.

As the last few months’ bank statements are required, the lender can also confirm that your source of income is steady. This proves that you would not run out of funds and have a stable employment.

2)      Monthly Average Balance (MAB)

Your monthly average balance or MAB is an important consideration for lenders. If you have a low amount of funds in your bank, lenders won’t be confident in your ability to afford a monthly EMI.

One of the best practices that most financial experts recommend is to maintain at least 3 months’ worth of expenses in your account. This isn’t helpful only for your loan application, but with your general finances as well!

3)      Outgoing Debts

Maybe you earn a high salary, but have loads of outgoing expenses. Or, you have multiple -and hefty- EMIs that are draining your finances. In such a situation, lenders may be wary about providing a fresh loan since they will perceive you as lacking the financial capacity to take on another debt. The only time they may overlook this is if a borrower is applying for a debt consolidation loan.

If you are in such a situation, try to pay off the majority of your debts before applying for a new loan. Having a few existing debts and EMIs is perfectly fine, so long as they are manageable and are being paid on time.

Conclusion

Bank statement is one of the most important documents that a lender will ask for, since it verifies your income and income stability. Try to have a good level of financial stability and low/non-existing debts in order to avail high loan amounts with low-interest rates. Make sure that you provide at least 3 to 6 months’ statements as requested by the lender.

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