Personal loan has always been one of the most popular loan. Its ease in availability and quick processing is the major factor behind its popularity and that’s why more number of people are going for it. Personal loans comes under the category of unsecured loan which means you don’t need to have any collateral or something to give as security against your personal loan. Being unsecured in nature increases the risk factor to the lender. So, for the lenders checking eligibility of the borrower in a detail way and on various criteria is the only option by which they can minimize their risk factor.
The basic meaning of eligibility is ‘Fit to be chosen’. In other words you can say by checking for the eligibility factors the lenders wants to know that are you worthy to get a loan from them? Will you we able to repay them the amount lend along with the interest on time? Being unsecured in nature the lenders don’t have any collateral or security from which they can recover their loan in case if the lender is not able to repay. Hence it becomes more important for the lenders whether a bank or a NBFC to check for the eligibility.
Methods of Calculating Personal Loan Eligibility
There are many financial institutions who gives you personal loans. For calculating the eligibility different lenders uses different methods but there the two methods which are mostly used by the lenders and those two methods are-
- Multiplier Method
In this method we use a simple formula.
Loan Eligibility = (Your Net Salary) x (a number from 9 to 18)
Under Multiplier Method the Banks give a basic multiplier on the Monthly Net Take Home Salary to ascertain the Loan Amount Eligibility of a client. This multiplier differs from 9 to 18 which depends on your profile and your company in which you are employed (Company’s Name, NTH, and so on.).
- FOIR – Fixed Obligations to Income Ratio
Under the FOIR Method, the maximum EMI that most of the lenders and the Banks/NBFCs offer to a client shifts from 50-75% of their NTH income (salary). The banks can likewise consider existing loans and other outstanding amounts of credit cards and then figure out the Final Loan Eligibility. You can compute (calculate) your Eligibility even by the eligibility calculators provided on different websites.
The formula for calculating FOIR is:
FOIR = (Sum of Existing Obligations/Net Take Home Monthly Salary) * 100
Let us take an example, if your income INR 70,000 per month, and you have a ongoing personal loan for which you pay an EMI of INR 6,000 and another car loan of INR 9,000 per month. Now, considering the fact that 50% of your income can be paid towards loans.
Now we have,
50% of 70,000 = ₹ 35,000
Car Loan EMI = ₹ 9,000
Personal Loan EMI= ₹ 6,000
So, your disposable income for this fresh loan is:
35000 – 9,000 – 6,000 = ₹ 20,000
FOIR = (9,000+6,000)/70000 = 15000/70000 = 0.21 or 21%
This means the moneylender won’t provide the loan , if the monthly EMIs cross ₹ 20,000 even at the longest tenor. In the case if the EMI for the asked amount is not exactly ₹ 20,000, the candidate will have a genuine high chance to get the loan. This method decides how much a candidate can bear to pay as EMIs while paying their different EMIs too.
Factors on which Lenders Calculate Personal Loan Eligibility
Income and Debt Ratio
Your income is the most important factor on which your repayment capacity can be decided. Higher is your income the more capable you are to repay your loans. That’s the reason every lender fix some particular amount as the minimum required income to avail a personal loan. But here income cannot be the only factor to decide the eligibility, suppose there is a person whose monthly income is INR 70,000 and he already have some loans whose EMIs cost him half of his salary so in this case he is not eligible for a new personal loan. As to have a personal loan it is considered that 50% of the income is considered for the personal expenses and rest 50% for the EMIs including loans and credit cards.
Credit score popularly known as CIBIL score is just the numeric value which depends on your credit and financial history completely. This value generally varies from 0 to 1300. Among which a credit score of +750 is considered as the best. This is a factor which every lending institutions looks before approving any applicant’s loan application. A CIBIL of 750 and above is considered best as this score indicates that the person have a good financial history and was on time with all this loan repayments and EMIs. The person who have this score will face no problem in getting a new loan and almost every lender will be easily ready to lend them. A CIBIL less than 750 indicates a weak credit history and person having this score have to face difficulties in getting a new loan.
Age is one of the eligibility criteria which lenders looks at the time of lending. According to the lenders the younger you are the more capacity you have to repay your loan. That’s the reason by most of lenders has set the age of 21 to 60 as the eligible age to avail a personal loan. Suppose a person applies for a personal loan at the age of 58, then in this case he will get a loan but the tenor period of his loan will be only 2 years i.e. till he turns 60.
Employment stability is also among those factors which gets considered while checking for a personal loan eligibility. If you are working in some renowned company from a long duration of time then for you it is surely very easy to get the loan. Whereas if you are not working in a good company that too going with frequent job change then it might be difficult for you to get a personal loan even if you satisfy the income (salary) criteria. Stability of job is required to have a personal loan.
Now a days, forgeries, identity theft are very common thing. So, to be protected from all these things banks needs some documents to believe the borrowers. These documents needed for this are- document for identity proof, document for address proof and document for income proof. If you have these documents with you and you submit it while applying for a loan then you are 100% eligible for availing the loan. These documents makes the lenders protected and minimises the risk factor too.