A personal loan is a great solution for individuals looking to meet various expenses, whether it is funding for higher education, making home renovations, or covering unexpected medical bills.
However, it is important to understand how your personal loan amount is calculated before applying for one. Your monthly income is one of the many factors that are considered when approving the personal loan amount. Lenders may also consider several additional factors, like your credit rating, debt-to-income ratio, etc.
Factors influencing the personal loan amount
- Credit score
One of the most critical factors influencing a personal loan is your credit score. Lenders use credit score to assess the creditworthiness of borrowers and their ability to repay the loan. A higher credit score enhances the probability of getting a loan and a higher sanctioned loan amount. For our personal loan applicants, we set a CIBIL Score threshold of 685 or higher.
- Income
The borrower's income plays a crucial role in determining the loan amount. Lenders assess this parameter to ensure that they have the financial capacity to repay the loan. A stable and steady income source increases the chances of loan approval and may also lead to a higher loan amount being sanctioned.
- Debt-to-Income (DTI) ratio
The DTI ratio measures the borrower's total debt obligations as a percentage of their income. Lenders use the DTI ratio to gauge the borrower's ability to manage additional debt payments.
A lower DTI ratio indicates that the borrower has sufficient income to accommodate the new loan payment, making them eligible for a higher loan amount.
- Repayment history
Lenders closely assess how you have managed your past debts, including credit cards, loans, and other borrowings. A good repayment history with no defaults or late payments demonstrates responsible financial behavior and indicates that you are a low-risk borrower. Maintaining a strong repayment history is vital for securing a higher loan amount.
- City of residence
Your city of residence can also influence your personal loan amount. Lenders consider the city's cost of living, economic conditions, and job opportunities when evaluating loan applications. Borrowers residing in metropolitan cities or regions with a higher cost of living may qualify for larger loan amounts compared to those living in smaller towns or regions with lower income prospects.
How personal loan is calculated?
A personal loan is calculated based on several key factors. Firstly, the principal amount borrowed serves as the base. Secondly, the interest rate, usually expressed as an annual percentage rate (APR), is applied to the principal. The loan term, typically in months, dictates the duration of repayment.
We have a host of useful tools available on our website, such as the personal loan eligibility calculator. Click here to learn about the eligibility criteria for our personal loans and calculate the loan amount you are eligible for.
