It’s true that personal loans are unsecured. Applying for a loan from a bank does not necessitate providing collateral or security. That’s why the lender’s capital is in jeopardy. Lenders weigh a variety of elements to determine if you are creditworthy. In this piece, personal loan eligibility, how it’s determined is defined and strategies for increasing your chances of being approved for a loan are also provided.
What are the criteria for a personal loan?
To qualify for a personal loan, you must satisfy certain eligibility requirements. These criteria can vary per financial institution. The general requirements and restrictions for personal loan eligibility are outlined in the following section:
- Age should be from 21-68 years
- Employed/in business for a minimum of two to five years
- Work Experience Between 1 and 3 Years & Beyond
- Minimum monthly net income of Rs.15,000 or more
- CIBIL score of at least 750
- Professionals that are salaried, business owners, or self-employed
- Maximum EMI- Up to 65% of Earnings
How is personal loan eligibility determined?
Diverse lenders employ diverse approaches to calculate eligibility requirements. Below are 2 popular techniques used by lenders:
Method 1: Multiplication Formula
This method employs a basic formula.
- Eligibility for a Loan = (Your Salary) x (a number from 9 to 18)
- Depending on your credit history and your employer, banks assign a multiplier ranging from 9 to 18 as a standard.
Method 2: FOIR (Fixed Obligations to Income Ratio)
This is how banks determine your ability to repay. They subtract this amount from your monthly income after taking into consideration all the set commitments that you pay monthly or daily, which may include previous debt payments.
The formula used to compute FOIR is:
FOIR = (Sum of Current Obligations/Net Monthly Take-Home Pay) * 100
An example to facilitate comprehension.
If your monthly income is less than Rs.70,000 and you have loans such as:
- A 6,000 personal loan EMI
- A car loan monthly payment of 9,000
To establish a borrower’s ability to repay, banks examine the fact that 50% of their income might be applied to debt payments. Therefore, 50% of 70,000 in our case is 35,000.
Total debts = Auto Loan EMI + Personal Loan EMI = 9,000 + 6,000 = ₹ 15,000
Therefore, your available income for this new loan is equal to fifty per cent of your income minus your total debts =₹ 35000 – ₹ 15,000 = ₹ 20,000
According to the above FOIR calculation, 15,000/ 70,00 * 100
FOIR = 21%
If the new personal loan EMI exceeds 20,000 even for the longest term, the bank or lender will not give the loan. However, if the EMI of the new loan is less than 20,000, you may qualify for the loan.
How can you make your personal loan eligibility better?
If you want to know how to apply for a personal loan and how to increase your chances of being approved for a Personal Loan, you can do the following:
- A credit report can give you an idea of where you are financially, so it’s a good idea to check yours regularly. Try to improve your credit rating. If you keep up with your credit card payments and EMIs, you can achieve that goal.
- Work toward improving your “Income to Debt Ratio.” Get rid of the monthly payments on your long-term loans by paying them off. Reducing your debt load increases your chances of being approved for a higher interest rate and loan term on a personal loan.
- Send the lender all paperwork they request. Create a checklist of everything you need to apply successfully. It’s necessary for a speedy loan application procedure. Verify the authenticity of all your documents.
Do you meet the requirements for personal loan eligibility? You’re now able to apply for a cheap personal loan.