Introduction to Personal Loan
A personal loan is a popular financial tool that provides individuals with access to funds for various personal needs, such as debt consolidation, home renovations, medical expenses, or travel. The loan amount that you can avail depends on factors, with your salary being one of the influencers. In this article, we will explore how your salary impacts your eligibility for a personal loan, the factors lenders consider, and essential tips to maximize your borrowing capacity responsibly.
Understanding Personal Loans
A personal loan is an unsecured loan that does not require collateral. Unlike specific-purpose loans (e.g., home loans or car loans), personal loans give borrowers the flexibility to use the funds as per their discretion. Lenders assess your creditworthiness and ability to repay the loan before determining the loan amount they are willing to offer.
Factors Affecting Personal Loan Eligibility
Monthly Income: Your monthly income is a factor that lenders evaluate to determine your repayment capacity. A higher salary indicates a better ability to repay the loan, increasing your chances of securing a larger loan amount.
Credit Score: Your credit score is an indicator of your creditworthiness. A higher credit score signifies responsible credit behavior and a lower risk for lenders. A good credit score can positively impact the loan amount and interest rate you qualify for.
Debt-to-Income Ratio (DTI): Lenders assess your DTI ratio, which compares your total monthly debt obligations to your monthly income. A lower DTI ratio indicates a better ability to manage debt, improving your chances of approval for a higher loan amount.
Employment History: A stable job history can enhance your loan eligibility. Lenders prefer borrowers with a consistent employment record as it reflects a steady source of income.
Existing Financial Obligations: Other financial commitments, such as ongoing loans or credit card dues, impact your disposable income. Lenders consider these obligations when evaluating your eligibility to apply for personal loan.
How Much Personal Loan Can You Avail on Your Salary?
Salary Multiplier Method:
Lenders typically use the salary multiplier method to calculate the maximum loan amount a borrower can avail. The multiplier varies from one financial institution to another, but it is generally around 15 to 20 times the applicant’s monthly salary. For instance, if your monthly salary is ₹50,000, and the multiplier is 15, the maximum loan amount you can avail is ₹750,000.
Fixed Obligation to Income Ratio (FOIR) Method:
Some lenders use the FOIR method, which calculates the loan amount based on the borrower’s fixed obligations (such as existing EMIs) in relation to their income. Generally, lenders set a maximum FOIR limit, often around 50% to 60%, ensuring that the borrower has sufficient disposable income to meet loan repayments.
For example, if your monthly income is ₹80,000, and your fixed obligations (existing EMIs, rent, etc.) amount to ₹30,000, the maximum loan amount you can avail will be calculated based on the remaining ₹50,000 of disposable income.
Credit Score and Loan Amount:
Your credit score plays a role in determining the loan amount you can avail. A higher credit score may allow you to secure a larger loan amount at a more favorable interest rate. Conversely, a lower credit score may result in a lower loan amount or higher interest rates due to perceived risk to the lender.
Tips to Maximize Your Borrowing Capacity Responsibly
Improve Your Credit Score: A good credit score not only enhances your loan eligibility but also helps you negotiate better terms. To improve your credit score, ensure timely payment of bills and existing loan EMIs, avoid excessive credit utilization, and review your credit report regularly for errors.
Minimize Existing Debt: Pay off outstanding debts, if possible, to reduce your DTI ratio and increase your disposable income. This will demonstrate to lenders that you can manage additional credit responsibly.
Choose a Suitable Tenure: Opt for a loan tenure that offers affordable EMIs without stretching your finances. A longer tenure may result in smaller EMIs but higher overall interest costs.
Avoid Multiple Loan Applications: Submitting multiple loan applications within a short period can impact your credit score. Choose the lender carefully and apply only after comparing various options.
Consider Co-Applicants: If your salary alone does not meet the loan eligibility criteria, you may consider applying with a co-applicant, such as a spouse or family member, who has a higher income and good credit history.
Your salary plays a role in determining the amount of personal loan you can avail based on your salary. Every lender has different eligibility criteria to avail a personal loan depending on various factors like monthly salary, credit score and stability in employment etc. for example lendingplate is RBI registered NBFCs which provide a personal loan up to ₹2,00,000 and a borrower should have ₹20,000 monthly salary to avail a personal loan. However, it’s essential to remember that responsible borrowing is crucial to avoid overburdening yourself with debt. Before applying for a personal loan, assess your financial situation, evaluate your repayment capacity, and choose a loan amount that you can comfortably repay over the loan tenure. By maintaining a good credit score, managing existing debts wisely, and adhering to the lender’s guidelines, you can increase your chances of securing the desired loan amount at competitive terms.