Title  – What are the factors lenders take into account to calculate the personal loan amount?

Personal Loan is the one of the most sought after loans in the loan market. In India, the market of personal loan has grown by 30% compared to last year this time. There are multitudes of banks and NBFCs in the country offering personal loans for salaried and personal loan for self-employed. As personal loan are unsecured, banks exercise a lot of caution and screening to potential borrowers before disbursing. Moreover, the interest rates for personal loan are also high compared to other loans. 

Technology has simplified the personal loan process eliminating a lot of paperwork and saving your time. You can now apply from the comfort of home and get instant approval. The amount disbursed vary from individual to individual depending on their repaying ability, Loan to debt ratio, credit score among other factors. 

The calculation of a personal loan amount depends on various factors, and different lenders may use slightly different methods. However, here are some common methods used by lenders to determine the personal loan amount:

Income-Based Method:

Lenders often consider your income as a primary factor in determining your loan eligibility. They may have a fixed debt-to-income ratio (DTI) that helps them decide how much of your income can be allocated to loan repayments. Lenders typically expect a DTI of 35% – 40% or less

Fixed Obligation to Income Ratio (FOIR):

FOIR is a measure of the borrower’s ability to repay the loan. It takes into account all fixed obligations, including existing loan EMIs, and sets a limit on how much of the borrower’s income can be used for debt repayment. The remaining income is considered as the surplus, which can be used to repay the new loan.

Credit Score:

Your credit score plays a crucial role in determining the loan amount. A higher credit score often results in a higher loan amount and better terms. Lenders use your credit score to assess your creditworthiness and the risk associated with lending to you. A credit score of 750+ makes you instantly eligible for a personal loan. However, there are multiple NBFCs and personal loan apps in the market that are offering to individuals with low credit score or no credit score. It is very important to check your credit score and credit report often as discrepancies in the credit report can hit your credit score badly. Most fintech sites offer free credit report check as an incentive for their patrons

Multiplier Method

Many lenders use the multiplier method to calculate the personal loan amount eligible for loan. Under this method, the lenders calculate the loan amount by multiplying your monthly net income with a predetermined multiple. The multiple can lie anywhere between 10 to 24 times depending on the lender and their monthly income. For example if your monthly income is Rs. 20000, you can get a loan amount anywhere between Rs. 2 Lakhs to Rs. 4.8 Lakhs. 

Loan-to-Value (LTV) Ratio:

In cases where the personal loan is secured against an asset (like a car or property), the LTV ratio is used. This ratio is the percentage of the asset’s value that can be borrowed. For example, if the LTV ratio is 80%, you may be eligible for a loan amount that is 80% of the appraised value of the asset.

Repayment Capacity:

Lenders assess your repayment capacity by considering your current financial obligations, including existing loans and monthly expenses. They evaluate how much of your income is available for loan repayment after meeting all other obligations.

Employment Stability:

Some lenders consider the stability of your employment and the time you have spent with your current employer. A stable job history may positively impact your loan eligibility.

Loan Tenure:

The loan amount can also be influenced by the tenure of the loan. Longer tenures may result in lower monthly EMIs but may also affect the maximum loan amount you can borrow.

Age of the Borrower:

Some lenders have age restrictions for loan applicants. Younger individuals may be eligible for higher loan amounts compared to older individuals, as they are perceived to have a longer working life ahead.

It’s important to note that the specific criteria and methods can vary among lenders, and they may use a combination of these factors to assess your eligibility for a personal loan. Before applying for a loan, it’s advisable to check with the specific lender to understand their criteria and requirements.