Personal loans come with the added benefit of zero collateral. Hence, it has become a fairly popular financial tool to help meet certain expenses. However, your personal loan eligibility depends on several factors, such as your income among others. Let’s see how lenders determine your loan amount based on your salary.
How to find out your personal loan eligibility?
Since personal loans are unsecured loans, loan providers have several criteria to ensure you can repay them. The factors that determine your eligibility for a personal loan based on your net income include:
Fixed Obligations to Income Ratio (FOIR): The lender takes into account every financial obligation that you must meet every month. These are called fixed obligations and exclude statutory deductions for provident funds, investments like recurring deposit and insurance, and professional tax. Rent can also be considered as a fixed obligation depending upon the level of your income. FOIR is calculated as per the following formula:
FOIR= (Total amount of fixed obligations per month/net monthly salary) X 100
The loan provider uses FOIR to determine the disposable income that you can utilize to repay your loan.
Illustration: If your monthly income is Rs. 60,000 and your fixed obligations are 50%, then you have 50% of Rs. 60,000, i.e. Rs. 30,000 in hand to repay your loan. If you already have existing debts like a car loan or home loan, the consolidated EMI for which amounts to Rs. 20,000, lenders will then sanction a loan amount, the EMI for which does not exceed Rs. 10,000 (Rs. 30,000 – Rs. 20,000).
Multiplier Method: Under this method, the lending institution applies a multiplier on your monthly take-home pay. The value of the multiplier varies from 9 to 18 (27 in some cases). The final number depends on the profile of your employer and your salary. Here’s the formula used to calculate your personal loan eligibility using this method:
Loan Eligibility = (Your Net Salary) X (Multiplier)
Lenders apply different internal categories to various companies as per their reputation. Being employed at a high salary and stable company will increase your chances of getting a loan and lower your personal loan interest rates.
Is there any minimum salary criterion for personal loans?
The minimum salary required for approval of personal loan varies from one financial institution to another. Some of the factors that loan-disbursing authorities consider to determine your eligibility include:
- Your age
- Credit score and history
- Whether you live in your own house or rented accommodation
- Your location
- Your total work experience
- Other loans or debt
If you are in urgent need of funds, you can apply for Tata Capital personal loan for salaried employee. With flexible repayment options and affordable personal loan interest rates, you can cover any expense with ease.