A personal loan can give you the much-needed funds to get through tough times, be it for a wedding, health-related emergencies, or a major purchase. Since it is an unsecured loan, you can easily apply for an instant personal loan without providing any collateral.
The personal loan amount you can borrow depends on many factors, including your income, debt, and credit history. However, one of the most important factors most lenders consider while approving or rejecting your loan application is your monthly income. This is because a personal loan needs no collateral or security; thus, lenders need to be sure that you can make your monthly loan payments on time. Read on to know how lenders calculate your personal loan eligibility based on your income.
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How much personal loan can you qualify for your salary?
Once you meet basic personal loan eligibility criteria such as age, income, credit score, etc., lenders may use any of the two methods to determine the total loan amount you may be eligible for. These are the multiplier method and the Fixed Obligation to Income Ratio (FOIR).
In the multiplier method, lenders multiply your income by a pre-determined multiple that can range between 10 and 27 depending on the specific lender. This gives them an idea of how much money you can afford to repay each month over the tenure of five years. In case you have any other financial obligations, the amount you owe will be deducted from your monthly income and then multiplied with the pre-determined multiple. For instance, if the pre-determined multiple is 27 and you have a salary of ₹30,000 with no existing EMIs, you may be eligible for Rs 8.10 lakhs for 60 months.
In the FOIR method, a ratio is calculated by dividing your monthly fixed obligations (such as EMIs for existing loans or other debts) by your monthly income. If the ratio is more than 50%, then it might affect your personal loan eligibility because this means your monthly obligations are too high as compared to your income.
Here is how the fixed obligation income ratio is calculated.
FOIR = (Total fixed monthly obligations/Total monthly income) x 100
Find out the maximum loan amount you can get using an online calculator
A personal loan eligibility calculator is an online tool offered by many financial institutions on their websites. You can use this online tool to check the maximum amount of loan you may qualify for from multiple lenders.
Furthermore, you can use this tool multiple times and compare personal loan interest rates of different lenders without paying any charges. Just enter some basic details like your monthly income and existing liabilities, after which the calculator will show you the result. This way, you can apply for a loan with the right amount and improve the chances of your loan application getting approved.
To sum up
These are the methods through which lenders determine the amount of personal loan you can get based on your salary. However, there are also other eligibility criteria besides salary that you need to fulfil to get your loan sanctioned successfully. Each factor, from your age to your repayment capacity, is important in the approval process. Therefore, before you apply for a personal loan, it is important to work on improving your overall eligibility.