Personal loan eligibility: 5 key factors that determine the amount you can borrow

For many borrowers, a seamless and hassle-free personal loan process is a coveted aspiration. This is because determining the suitable personal loan amount is more than just arriving at a numerical figure. It constitutes a crucial decision with financial ramifications, making it imperative to take into account various factors before proceeding with the loan application. 

Moreover, the personal loan eligibility criteria vary between salaried individuals and self-employed borrowers. While certain lenders may provide personal loans tailored for self-employed professionals such as doctors, lawyers, or chartered accountants, with potentially more lenient requirements, salaried individuals with a steady work history and a strong credit score typically find it easier to qualify for a personal loan compared to self-employed borrowers.

Using personal loans as a means to secure funds for diverse personal expenses can be an option, but it’s vital to approach this avenue with caution and responsibility. 

Factors affecting personal loan decisions

The decision of how much to borrow is a highly individual one, contingent on your unique financial situation and objectives. The extent to which you can secure a personal loan is contingent upon various factors.

• Your earnings play a crucial role in lenders’ evaluations of your loan repayment capacity. Typically, lenders utilise a multiplier method, where they multiply your monthly income by a specific factor (typically ranging from 10 to 24) to establish an initial loan amount.
• Your credit score and history carry significance, as a favourable credit score reflects responsible credit behaviour, potentially resulting in more substantial loan offers and favourable interest rates.
• Lenders favour individuals with a consistent employment history, as it lowers the risk of potential loan defaults.
• Occasionally, lenders may provide increased loan amounts for particular purposes such as debt consolidation or home improvement.
• Various lenders possess different eligibility criteria and provide varying maximum loan amounts.

Zeroing on the desired loan amount

Although certain lenders in India may promote personal loans with a stated range from a minimum of ₹500 to a maximum of ₹40 lakh, the actual qualifying amount is likely to be considerably lower. It’s essential to bear in mind that exceeding a manageable repayment capacity can result in financial challenges.

Before determining the personal loan amount, utilise online personal loan eligibility calculators provided by numerous lenders to obtain a preliminary estimate of the potential loan amount you could qualify for. Additionally, prioritise the cultivation of a strong credit score by responsibly using credit cards and ensuring timely payment of bills. This effort can enhance your borrowing capacity in the future.

This is because opting for personal loans requires careful consideration, taking into account your current financial situation and potential future consequences. If uncertain, seeking advice from a financial advisor can prove advantageous.

Frequently Asked Questions (FAQs)

Q. What is the debt-to-income ratio (DTI) that lenders check?

The debt-to-income ratio (DTI) evaluated by lenders varies based on the lender, the loan type, and your creditworthiness. In general, lenders favour a DTI below 36%. This implies that your overall monthly debt payments should not surpass 36% of your gross monthly income (pre-tax and pre-deductions).

Certain lenders might entertain applicants with a DTI of up to 43%, but such applicants could face less favourable loan terms, such as elevated interest rates. In the case of particular loan types, such as mortgages, lenders may impose more stringent DTI requirements. For instance, some lenders may demand a DTI below 36% for eligibility for a conventional mortgage.

Q. Why is a good credit score for personal loan applications?

Securing a personal loan hinges on having a commendable credit score for various reasons.

• Enhanced likelihood of being approved
• Advantageous interest rates
• Availability of improved loan terms

Q. What should be the minimum credit score to get a personal loan?

The precise minimum credit score prerequisite for a personal loan fluctuates based on the lender and the specific loan product. Even within a single lender, credit score prerequisites can vary depending on the particular loan type. For instance, lenders may impose more stringent criteria for unsecured personal loans compared to secured loans that are supported by collateral.

Typically, a credit score of 720 or higher is deemed good and enhances your eligibility for personal loans with advantageous interest rates and terms. Borrowers scoring between 680 and 719 may secure approval but could face less favorable terms, such as elevated interest rates or shorter loan durations. Scores below 680 make it progressively difficult to secure personal loan approval. Nevertheless, certain lenders may still consider applicants in this range, imposing stricter eligibility criteria and potentially offering very high interest rates.

Q. What is the credit score pre-qualification tool?

Certain lenders provide a credit score pre-qualification tool, enabling you to assess your loan eligibility, potential interest rates, and terms without affecting your official credit score. Here is how it works:

• You furnish fundamental details about yourself, such as your income, employment status, and the preferred loan amount, on the lender's website or app.
• The lender conducts a soft inquiry on your credit report, which does not impact your credit score. This type of inquiry is only visible to you and the lender conducting the pre-qualification.
• Using the information you provide and the soft inquiry, the tool furnishes an estimated range of interest rates and potential loan terms that you may qualify for upon formal application.

Q. What are the benefits of using a credit score pre-qualification tool?

Some lenders provide a credit score pre-qualification tool, enabling you to obtain an estimated overview of your loan options and potential terms without impacting your official credit score. Here's a breakdown of the key advantages you can take advantage of:

• Determine loan possibilities: It assists in obtaining an initial understanding of the potential interest rates, loan amounts, and repayment terms you could receive before proceeding with a complete application.
• Evaluate lenders: Utilise pre-qualification tools from various lenders to compare choices and potentially discover the most suitable one based on your requirements and financial circumstances.
• Prevent hard inquiries: As it relies on a soft inquiry, utilising the pre-qualification tool has no impact on your credit score. This is essential, as multiple hard inquiries within a brief timeframe can have adverse effects on your credit score.