How Do Banks Calculate Eligibility Of Personal Loans In India?

Updated on: 14 Dec 2021 // 23 min read // Personal Loans
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Personal Loans have been known to be the saviours of thousands and lakhs of individuals who were in need of some additional funds to meet an urgent need or fulfil an impending financial obligation. Thanks to its easy approval and quick disbursal, it is obvious for you to consider taking this loan when in need of extra money.

When you set out to take a Personal Loan from any of the leading banks or online loan aggregators in India, the lender takes into account a series of factors before making the call regarding whether or not you are eligible for the loan. We understand that you must be curious to know how banks calculate your Personal Loan Eligibility; so, let us break down this crucial process for you here.

Step 1 – Investigating Your Income

The lender usually starts by understanding your source of income, and its quantum. This is usually done by assessing the relevant documents submitted by you, including – Salary Slips, Banks Statements, and Income Tax Returns, and if you are a self-employed business owner then your P&L Statements as well.

Based on the data retrieved from the documents, the lender determines your net monthly income.

Step 2Calculating Your Savings

While the amount of money one saves differ from person to person, most lenders assume that a person saves at least 20 to 30% of their monthly income. This implies, that if you earn Rs. 1 lakh per month, you will at least save Rs. 20,000. 

Step 3 – Deducting Your EMIs

If you are currently servicing a loan, the lender will deduct the amount you pay per EMI from your assumed savings. Hence, if you are paying an EMI of Rs. 7,500 towards your car loan, the lender will assume that your net savings are Rs. 20,000 – Rs. 7,500, which would be Rs. 12,500. 

Step 4 – Deducing Your Ideal Loan Amount

Now that the lender knows that you are able to save Rs. 12,500 every month, it will assume it as your ideal EMI. Considering that it is offering you the personal loan at 12% per annum, for 5 years, the loan amount you will be eligible for is – Rs. 5,50,000. Depending on your needs, you may apply for an amount lower than or equal to Rs. 5.50 lakh.

Best Personal Loan Online

That being said, you must be aware of the fact that you can apply for a loan amount higher than Rs. 5.50 lakh. In that case, the bank might question your ability to repay the loan, but if your Credit Score is high enough and you enjoy a steady financial position, your lender will be more than happy to offer you the required loan amount.

Now, the question arises – Do banks only take into account your income and debt to income ratio for calculation of personal loan eligibility? Fortunately, No!

As a matter of fact, there are a few other aspects that your lender will take into account before deciding whether you are an ideal candidate for a Personal Loan. These factors include –

Your Documents

When applying for a personal loan, you will be required to submit the relevant documents, as demanded by the lender, for –

  • Proof of Identity
  • Proof of Residence
  • Proof of Employment
  • Proof of Income

Only if the lender is able to verify these documents without finding any discrepancies, will your loan application be considered for further processing.

Your Credit Score

Your credit history plays an incredibly important role in determining your eligibility for a Personal Loan. Ideally, a score of 750 or above will imply that the bank is willing to offer you a loan without much deliberation. In case your score is in the range of 600-750, you may still get the loan, albeit at a higher rate of interest. If, however, your score is below 600, the chances are that your loan application may be turned down.

Your Income

A vast majority of banks need you to have a minimum income of Rs. 10,000 per month or more, to consider you eligible for a Personal Loan. In this case, SBI Personal Loan (Express Credit) might come to your rescue, as it only needs you to have a minimum income of Rs. 7,500 per month. Moreover, you can easily avail a regular Personal Loan from the bank without a minimum income regulation, since the maximum loan amount is restricted to 24 x your monthly earnings.

Your Source of Income

Your loan eligibility will also depend on your source of income. For instance, some banks readily offer Personal Loans to salaried individuals working for renowned organisations and shy away from offering these loans to business owners or self-employed professionals, due to lack of stability in the revenues. Of course, there are numerous banks and online lenders which offer Personal Loans to people from all walks of life.

Your Repayment Ability

As mentioned earlier, the lender usually takes a look at your income and fixed expenses, to see whether you have ample disposable income to pay your EMIs. Only if the amount is high enough, will the lender consider you eligible for the loan.

We hope that you now have a fair idea of how banks calculate your Personal Loan eligibility. You can now analyse these factors on your own and go ahead to apply for PNB Personal Loan or any other such loan and fulfil your financial obligations with ease.


Also Read: Understand Personal Loans in 4 Minutes!


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