A bank personal loan is a great way to tide over emergency or unforeseen expenses. Be it a case of hospitalization, big-ticket purchases or home renovation, this financial instrument can be obtained swiftly and with zero collateral. However, applicants need to be aware of how much loan they can apply for. Since these are unsecured loans, they carry a higher rate of interest than other loans, hence the amount of scrutiny by the bank or fintech companies will be higher when you are applying for a personal loan. If you need to check out the amount of personal loan you can get, then factor in these crucial points –
1. Your present income
Your income is the biggest factor. Institutions will consider your take-home monthly income post taxes. Also if you already have an existing liability then this will be deducted from the eligible income. Fintech companies suggest that banks usually factor in 45%-50% of the monthly take home income as the EMI for salaried loan processing and determine the loan amount based on this ground rule. Take this small illustration:
- Net post tax income = Rs. 30,000
- EMI on existing home loan = Rs. 7,000
- EMI on existing two-wheeler loan = Rs. 1,000
Income eligible for personal loan = (30000-7000+1000) x 12 = Rs. 2,64,000
Also now that your net salary after EMI is Rs. 22,000, the banks will lend an amount where the EMI will be a maximum of Rs. 11,000 (50% of the net salary).
2. Your credit standing
Personal loans do not carry the obligation of a collateral. This means a higher risk for lending banks. In order to protect their loans, they charge a higher rate of interest and maintain a stricter application approval process. As any fintech company or finance advisor would recommend, make sure that you build a good case of timely repayments of loan amounts so that you can have a healthy credit standing in 4-5 years’ time.
In India, Credit Information Bureau India Ltd. (CIBIL), now known as TransUnion CIBIL, is the primary organization that banks turn to when checking the credit standing of an applicant. The CIBIL rating is out of 900 points. Banks usually consider a CIBIL score of 750+ for processing personal loans. Points are reduced based on the amount of defaults or late payments on your various loans across the last 4-5 years.
3. Your employment and city of residence
If you are employed at a startup or a company with less than 100 employees, then banks will lend you less and process your application with greater scrutiny. Since repayment is riskier with startups or smaller companies, the chances of getting a higher amount as personal loan will be fewer as compared to being employed in a large company like Infosys. Also if you are living in an urban or metro city, your eligibility will factor in a higher salary as compared to a rural area.
When calculating eligibility amount, lending firms like Money View or banks apply one golden rule – the applicant needs to be able to repay back the EMIs on the loan comfortably without running the risk of default.