A personal loan is an unsecured loan. When you apply for a loan, banks would not ask for any collateral or security. That is why there is a danger because the lender’s money is at stake. As a result, lenders assess a variety of elements while determining your creditworthiness. Based on these factors banks have set a personal loan eligibility, to filter the applications at the first step.
Personal Loan Eligibility
Banks consider various factors before approving any personal loan application, these factors include the applicant’s age, income, credit score and other factors. Each bank has its own set of criteria but the basic factors that they consider remain almost the same. Applicants must fulfill these eligibility requirements in order to obtain a personal loan. The standard eligibility criteria is mentioned in the table below
|Age||21 to 68 years|
|Minimum Net Monthly Income||INR15,000 and above|
|Employment Status||Employed / In-business for at least 2 – 5 years|
|Type of Employment||Salaried, Business owner, Self-employed professionals|
|Work Experience||1 to 3 years & Above|
|Credit Score||CIBIL score of 750 or more|
|Maximum EMI||Up to 65% of Income|
Before applying for a personal loan you can even refer to a personal loan eligibility calculator to check whether you are eligible or not for a personal loan.
How is Personal Loan Eligibility Calculated?
The process to calculate might differ from bank to bank as each bank can have its own way of calculating the personal loan eligibility. However there are 2 standard methods that are used by major banks to calculate the personal loan eligibility.
Method 1- Multiplier Method
Banks use the multiplier method to calculate your personal loan eligibility by taking into consideration your salary, the company you are employed with and your credit score. Banks use a simple formula by assigning you a multiplier, that depends on the above mentioned three points. The multiplier can range from 9 to 18 depending on your credit profile. Banks generally use a simple formula, to calculate your personal loan eligibility by the multiplier method, that is mentioned below-
Personal Loan Eligibility = Applicant’s Salary x any number between 9 to 18 (assigned by the bank based on applicant’s credit profile).
Method 2- Fixed Obligations to Income Ratio (FOIR)
By using this method, banks determine your repayment capacity by taking into account all of your monthly obligations, including EMIs on current debt, and remove them from your monthly income. By doing so, banks have a good notion of how much money you’ll have left over after paying off all of your monthly responsibilities and how much you’ll be able to pay the EMI at the end of each month. The formula than banks use while calculating via FOIR method is mentioned below-
FOIR = (Total of existing obligations / Net In-hand monthly salary) x 100
Example– If you have an in- hand salary of INR1,00,000 per month and have the below mentioned obligations
- Personal Loan EMI of INR 10,000
- Car Loan EMI of INR 8,000
- Home Loan EMI of INR20,000
The total amount of all liabilities is 10,000 + 8,000 + 20,000 = 38,000
Banks generally consider that 50% of your monthly income can be paid towards your debts. Therefore in this case, 50% of 1,00,000 = 50,000.
Amount left with which you can pay for this fresh loan is
50% of your income – Total liabilities = 50,000 – 38,000 = 12,000
As per the FOIR formula- 38,000 / 1,00,000 * 100
So, FOIR = 38%
In this example, if the new personal loan EMI exceeds 12,000, even for the longest amount of time, the bank would refuse to provide the loan. However, if the new loan’s EMI is less than 12,000, you may be eligible for the loan. As a result, the FOIR method can help you determine how much EMI you can afford to pay on a new personal loan while paying off your current obligations.
What Factors Do Lenders Consider While Evaluating Personal Loan Eligibility?
The factors used to determine personal loan eligibility may vary from one bank to the next. The following are the most common factors used to determine personal loan eligibility.
1. Credit score
Improving your credit score before applying can help you in improving your chance of getting your application approved.
People between the age of 21 and 68 are usually taken into account for a personal loan.
3. Minimum income
Generally the minimum monthly income criteria is usually INR15,000. An income of INR25,000 or more per month is preferred.
For salaried professionals, a minimum work experience of 2 years with a minimum of 6 months in the current organisation.
For self- employed individuals, a minimum of 2 years in current business is preferred.
5. Debt-to-income ratio
The lower the debt-to-income ratio, the higher are your chances of getting a personal loan approved.
Can You Improve Your Personal Loan Eligibility?
Yes, you can improve your personal loan eligibility by following the below mentioned steps.
1. Maintain a Good Credit Score
Having a good credit score improves your chances of getting your loan application approved. To be eligible for the best personal loan offers, you must have a credit score of 750 or above. However, if you do not have a good credit score, you should work on improving it before approaching any bank for a personal loan.
2. Do not apply for too many loans at the same time
Applying for multiple loans at the same time makes you look desperate and you might damage your credit score as well as your chances of getting a personal loan. Your loan applications would be recorded as a hard inquiry on your credit report, and if lenders notice a high number of such inquiries, they presume you are anxious for loans, which does not reflect well on your financial behaviour. It is preferable to wait at least 6 months between personal loan applications.
3. Be Cautious of Debt-to-Income Ratio
Your debt-to-income ratio is calculated by dividing your monthly debt by your monthly income. EMI payments should not consume more than 50% of your earnings. So, it is recommended to keep your debt-to-income ratio as low as possible. Because lenders would not approve your personal loan application if they believe that you would be unable to repay it.
If you meet the personal loan eligibility criteria of the bank that you are applying for, then the process should be hassle free and you should be able to get the hold of the requested amount without any delay.