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How Banks Calculate Personal Loan Eligibility in India?

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A personal loan is an unsecured loan offered by both banks & NBFCs both to the individuals who are eligible. It is very important to know about the eligibility criteria of the banks as it will simplify and quicken the process. Every bank has different criteria regarding income, age, employment stability, credit score, etc. You need to meet the eligibility criteria of the banks in order to apply for a loan to get your application sanctioned. Each lender’s eligibility criteria varies based on the applicant’s profile and relationship with the bank.

Here are some factors that are considered in calculating your personal loan eligibility.

Minimum Income – To apply for a personal loan you should have the minimum income getting credited into your account on a monthly basis. The minimum income criteria set by most of the banks for salaried professionals is INR 15000. Although, individuals having a minimum income of INR 25000 are more preferable by banks. And for non-salaried individuals the banks require a minimum of INR 5 lakh gross annual income to process for personal loan.

Employer Reputation – Bank offers loans to both salaried individuals working in private, governmental, or multinational companies as well as to self-employed individuals and professionals like Chartered accountant (CA), businessman, doctors, architect, etc. Salaried persons who are working in renowned organizations or government employees are most preferred by the banks due to their employer reputation and their employment stability.

Credit Score – This is a three-digit number that shows your creditworthiness to the banks. It shows your repayment history that how you have handled your previous loans.

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This score is calculated by credit bureaus and ranges between 300-900. Usually if your credit score number is close to 900, then your chances of getting the loan increase.

Age – Age also plays a crucial role in getting you a personal loan. Most banks offer personal to individuals who lie between the age group of 18 to 60 years of age. Older individuals may also be eligible for loans such as pension loans, typically there are certain restrictions to such loans.

Work/Business experience – Many banks have specified their requirement that salaried persons must have a total experience of 2 years and a minimum of 6 months of experience in the current organization to qualify for a personal loan. While in case of self-employed individuals and professionals, they need to be in the business for a minimum of 2 years in order to apply for personal loan.

How the check personal loan eligibility – There are two methods on which the bank calculates the eligibility of an individual.

FOIR(Fixed Obligation to Income Ratio) Method – The FOIR method primarily considers the monthly income that the applicant draws to make payments for outstanding bills, EMIs, etc. Typically, if the FOIR percentage exceeds the 50 % of the take home salary, the applicant’s application gets rejected.

On an average, Banks only consider your 50% of your monthly income to check whether you are capable of adding one more EMI or not.

Net Monthly Income Method – Some lenders fix the maximum loan using a multiplier to the Net Monthly Income (NMI). In such cases, the eligible amount can exceed up to 30 times of NMI of the applicant. In such cases, if the loan amount applied for exceeds this amount, the application may not be deemed eligible for unsecured loan.

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Documents Required

The documents required for a personal loan application for salaried and non-salaried people are different. Here is the general list of documents required by the lenders

For salaried individuals

  • Proof of Id – Passport/Voter Id/PAN Card / Driving License
  • Proof of Residence – Rent agreement, Utility bill (not more than 3 months old), Passport
  • PAN Card
  • Last 3 months bank statement
  • Salary slip of last 3 months
  • Latest passport size photograph

For Self-employed individuals

  • The duly signed application form
  • Passport size photograph
  • Proof of Id – Passport/Voter Id/PAN Card
  • Proof of age – Birth certificate/Passport
  • Proof of residence – Passport /Utility Bill/ Allotment letter
  • Proof of income – Last 3 years Income Tax Returns (ITR), Audited and CA certified financials for the latest 2 years, which includes P&L, Balance Sheet, audit reports, etc.
  • Balance sheets – Last 3 months Bank statement/Last 6 months Bank Passbook

To have a better idea to know your eligibility for how much loan amount you are eligible for if you are meeting the basic criteria, then for that most of the banks have provided the Personal Loan eligibility calculator. It is easy to use and helps you to avail the right personal loan for you without any hassle.

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