Personal Loan Eligibility & Calculation

Personal loans are generally unsecured in nature and can be obtained without having to provide any collateral to the bank. Therefore, banks do not ask for any kind of security whenever you apply for a personal loan. But since the lender’s money is at stake, there is a risk involved in these kinds of loans as well. As a result, Banks have established a personal loan criteria based on various characteristics in order to evaluate the risk involved in lending to the applicant. This eligibility criteria varies from one bank to another but generally remains the same across all the major banks in the country. Banks consider a number of factors like your income and employment status, Credit Score, etc while establishing your creditworthiness.

Eligibility Criteria In Most Banks

Before approving a personal loan application, banks evaluate a number of elements, including the age of the applicant, income levels, along with the CIBIL score. Each bank has its own set of criteria, but the core characteristics they assess are nearly identical. In order to acquire a personal loan, applicants must meet certain qualifying requirements. Moreover, it is advisable to check whether you are eligible or not for a personal loan before applying in order to avoid rejection. The table below lists the standard eligibility conditions for the major banks in the country:

Personal Loan Eligibility Calculation

Every bank might have a different process of personal loan eligibility calculation. However, all the major banks in the country employ one of two most popular procedures to determine personal loan eligibility. Below are the two methods to calculate personal loan eligibility in India:

The Multiplier Method

Banks utilise the multiplier approach to determine your personal loan eligibility, taking into account your salary, the company you work for, and your credit score. Banks utilise a simple method to assign you a multiplier based on the three elements listed above. Depending on your credit history, the multiplier can range from 9 to 18. Banks typically utilise a simple formula to determine your personal loan eligibility using the multiplier approach, as described below-

Personal Loan Eligibility = Salary x any number between 9 and 18 (as assigned by the bank based on the applicant’s credit profile).

Fixed Obligations to Income Ratio (FOIR)

Banks use this method to evaluate your repayment capacity by subtracting all of your monthly commitments, including EMIs on current debt, from your monthly income. Banks may then estimate how much money you’ll have left over after paying off all of your monthly obligations and how much you’ll be able to pay the EMI at the end of each month. The formula to calculate eligibility for a personal loan using the FOIR approach is as follows:

FOIR = (Total existing commitments / Net monthly salary in hand) x 100

These are the most common calculation methods used by all major banks to evaluate your personal loan eligibility. 

Factors to consider while evaluating Personal Loan Eligibility

The criteria used to establish personal loan eligibility differ from bank to bank. The most prevalent factors used to evaluate personal loan eligibility are as follows.

1. Credit score

Improving your credit score before applying will help you increase your chances of being approved.

2. Age of the applicant

Personal loans are typically considered for people between the ages of 21 and 68.

3. Income

Generally, the minimum monthly income required is INR 15,000. However, banks prefer a monthly salary of INR 25,000 or more.

4. Work Experience

For salaried professionals, a minimum of 2 years of work experience with a minimum of 6 months at the current organisation is required. A minimum of two years in present business is preferred for self-employed individuals.

5. Debt to income ratio

The lower your debt-to-income ratio, the better are your chances of obtaining a personal loan.

How to Improve Personal Loan Eligibility?

You can improve your eligibility for a personal loan by following the procedures below.

1. Do not apply for too many loans at once.

Applying for many loans at the same time makes you appear desperate, and it may harm your credit score and your chances of securing a personal loan. Your loan applications will be recorded on your credit report as a hard inquiry, and if lenders detect a high number of such inquiries, they will assume you are desperate for loans, which does not reflect favourably on your financial behaviour. It is best to wait at least 6 months before applying for a personal loan.

2. Be wary of the Debt to Income ratio.

Divide your monthly debt by your monthly income to get your debt-to-income ratio. EMI payments should not take up more than 50% of your wages. Therefore, it is advisable to maintain a low debt to income ratio in order to improve your personal loan eligibility. Because lenders will reject your personal loan application if they fear you won’t be able to repay it.

3. Keep a Good Credit Score

A strong credit score increases the chances of approval on your loan application. It is important to have a credit score of 750 or above in order to be eligible for the best personal loan options. If you have a low credit score then it is most likely that the banks would reject your loan application. It is advisable to always check your credit score before applying for a personal loan to boost your chances of getting approval on your loan application. However, if you do not have a high credit score, then you can follow the steps on how to improve CIBIL score and then apply for a personal loan. 

The process should be simple and you should be able to obtain the necessary amount without any delay if you match the personal loan eligibility criteria of the bank to which you are applying.