How to Calculate Personal Loan Eligibility? Use A Calculator…

Why to bother and calculate personal loan eligibility? Is it worth spending time on it? Banks anyways does it for us, right?

Yes, but bank’s intervention happens often very late. By the time bank’s disclose our loan eligibility, we are almost on the verge of loan disbursement. Where is ‘loan planning‘ here?

As an individual, caring for loan eligibility is a good habit. This good habit is a part of loan planning. Non-preparedness about ‘how to manage the loan’, can lead to several disruptions in personal life. Why? Because loan can drastically increase ones “expense burden“.

Loan Eligibility Calculator

Data Input
Take Home Income (Rs./month)
Loan Interest Rate (%)
Loan Duration (in months)

Report
Savings Percentage Points Applicable (% / 100) Net Savings (Rs.) Monthly EMI Per Lakh (Rs.) Loan Eligibility (Rs.)

Why to know loan eligibility?

It is essential to be prepared for this extra burden. Let it be personal loan, home loan, education loan etc, preparedness is important. This preparedness will make the loan management a piece of cake.

When we allow debt in our life, strategies like loan planning, expense burden management, loan management etc cannot be ignored. The root of all these strategies is somewhere hidden inside "loan eligibility". The more we are aware of our loan eligibility, the better we can manage it. How?

This is what this article is about. How to know ones loan eligibility? Use the 'online loan eligibility calculator' provided above. It is easy.

But this article is not about the calculator, it is about what goes into estimation of ones loan eligibility. How banks estimate our loan eligibility? Why to know this?

Because it can give us deeper insights into loans, which eventually can help us to manage our loan well.

How knowledge of loan eligibility helps in loan management?

What is loan eligibility? The maximum loan a person's income can fetch for him/her. The value of the loan eligibility will vary between the types of loan. Example, home loan eligibility numbers will be different from a personal loan.

So let's see how knowledge of loan eligibility helps...

Suppose ones personal loan eligibility is say Rs.21,47,000. In isolation, this loan eligibility number will mean nothing for the borrower. So let's add to it few parameter to make it more meaningful.

• Personal Loan Interest = 11.75% p.a.
• Loan Tenure = 5 Years.

For a 5 year loan period at 11.75% p.a. interest, a personal loan of Rs.21,47,000 will cost an EMI of Rs.47,500 (approximately) to the borrower.

So what we can conclude from the below numbers?

• Personal Loan: Rs.21,47,000.
• EMI: Rs.47,500 per month.

I read these numbers like this: "The person can pay a maximum EMI of Rs.47,500. Hence the maximum personal loan that he/she can borrow from the bank is Rs.21,47,000."

The value of "Maximum EMI" is the key. It talks about the affordability of the borrower. How banks read the affordability numbers of the borrower? In our example, according to the banks, the borrower cannot pay more than Rs.47,500 in EMI's. Hence his maximum personal loan eligibility should be capped at Rs.21,47,000.

Once we start reading the loan eligibility numbers generated by the calculator like this, it will start making more sense. Knowing loan eligibility in advance, also tells us our maximum EMI paying capability. Knowing ones EMI paying capability is an integral part of 'loan planning'.

Now we are ready to know, how to calculate personal loan eligibility...

Formula for personal loan eligibility...

The most important parameter in the above formula is "net savings". Why? Because it is derived from ones income & expense patterns. The higher is the net savings, more will be the loan eligibility.

Apart from "net savings", other variables which are used to estimate loan eligibility are:

• Loan interest.
• Loan tenure.

The same variables has been used in the loan eligibility calculator provided above.

We have used the same formula code our calculator. I am sure Indian banks must be using a similar strategy to compute the applicants loan eligibility.

Hence my suggestion is, before applying for the home loan, get your 'loan eligibility' checked using the above calculator.

Using the results of the calculator, one can estimate ones EMI load (extra expense burden due to loan). How? Let's see an example.

Suppose there is a person whose details are as below:

• Monthly Income: Rs.95,000
• Loan Interest: 11.75%
• Loan Tenure: 5 Years (60 months).

The loan eligibility of this person can be calculated using the above calculator. The results will be as below:

• Maximum Net Savings Possible: Rs.47,500 per month.
• Max. Loan Eligibility: Rs.21,47,500

Let's see the woking of "net savings". It will give insights of how banks estimates ones net savings, and hence deduce ones loan eligibility.

How banks calculate "net savings"?

How we generally calculate our savings? We deduct our expenses from income (savings = income - expenses). Banks also use the same method. But for banks it is impossible to know the actual expenses levels of all applicants. Hence they use a rule of thumb.

Percentage Points: Generally banks consider 50% of income as “Net savings”. Let's call it as 'percentage points'.

A percentage point of 50% means, the person is spending 50% of his/her income and the balance 50% is the savings.

The 50 percentage point is a maximum value. It is not applicable for all people. For people who earn less, this percentage points is lower. Means...?

Example: A person earning Rs.200,000 per month may be eligible for 50% savings points. But another person earning Rs.60,000 per month may be eligible for lesser savings points (like say 35%).

My loan eligibility calculator separately highlights the percentage points for its users.

Net Savings: It is essential for banks to estimate the borrowers net savings accurately. A wrong estimation may lead to bad debt and non payment of EMIs. Hence banks take extra care to calculate net savings.

But it must be noted that, generally banks are neither too stringent nor too lenient in this calculation. Banks are generally more than inclined to give us loans, provided their bare-minimum criteria's are met by the borrower.

The below infographics will further elaborate on how banks estimate net savings...

1. Note down income (Rs./month)
2. Savings - 50% of Income*.
3. Credit Card Minimum Payment Amount:
   • Take a note of your last 6 months credit card bill.
   • Calculate the average of these 6 bills.
   • Minimum Payment = 5% of Average.
4. Take a note of any other loan EMIs paid each month.
5. Take a note of house rent paid each month.

[*P.Note: For lower income, lower percentage points will be used for calculation.]

Rent payment is a type of fixed liability. Hence banks consider them as a straight deduction from ones savings. Rent factor is more used in estimation of home loan eligibility. If a borrower is living on rent, and has applied loan for under-construction property, rent factor would pitch in.

Net Saving = Savings - (Credit Card Min. Payment + EMI + Rent)

Credit Score...

There is another important factor that must be considered in the process of estimating ones loan eligibility. Though it is not a direct entity of the loan eligibility formula, but it has a big say. What is it?Our credit score.

People whoo seek loan, must also ensure that their credit score is high. Why credit score is important for loan eligibility? Because, people with low credit score are treated differently by banks. Read this to know what must be your credit score to become eligible for loan in India.

Self Employed...

Like credit score, there is another thing which effects ones loan eligibility. A self employed person may not get loan as easily as a salaried person.

For salaried people, it is easier to get bank loan. Why? Because of their income predictability. But income of self-employed people may not be as evident.

If a self employed person is planning for a loan, he must keep his/her ITR Receipt of last 3 years handy. It will ease out the further procedure. If a self employed person can produce last 3 years ITR receipts to bank, along with the bank statement, it should be enough to work as an income proof.

More documents that may be required for availing loans are as below:

• Photo of applicant.
• Identity proof like Pan or Aadhaar Card etc.
• Address Proof like Aadhaar Card etc.
• Salary Slip / ITR Receipt (3Y).
• Form-16 / Bank Statement (6M).
• Education Proof (optional).
• Etc.