Personal Loan

How Do Lenders Decide on Personal Loan Eligibility?


A need for a loan can arise at any point in life. And the reasons for this can be many. From a wedding to debt consolidation or even home renovation. In these needy times, personal loans are your friend. They can be accessed instantly and without collateral. Although it isn’t always so simple to get one. There are certain parameters you need to satisfy for a lender to sanction the loan. Since personal loans are unsecured and lenders’ money is at stake, they have set these parameters to determine if you are worthy of credit. Let’s have a detailed look at how lenders decide on personal loan eligibility.

Personal Loan Eligibility: How Is It Calculated?

Different lenders use different methods to determine personal loan eligibility. However, there are two most common ways to calculate it. Let us take a look at it.

  • Multiplier Method

This method uses a basic formula.

Loan eligibility = your salary multiplied by a number between 9 and 18.

The number may vary based on your credit profile and the company you are employed at.

  • Fixed Obligations to Income Ratio (FOIR)

This is one of the most commonly used methods by banks and other financial institutions to calculate personal loan eligibility. Firstly, total monthly debts are taken into account. It includes EMI payments, credit card bills, rent, and other living expenses. This sum is then divided by the total monthly income of the applicant, multiplied by 100.

FOIR = (sum of total debt/total monthly income) X 100

An ideal FOIR ranges between 40% and 55%. It is the ratio of your debt to your income.

Factors that Determine Personal Loan Eligibility

  1. Employment Type

Lenders will first check whether you have a stable source of income. This includes salaried individuals, self-employed individuals, and business owners generating consistent income. Checking this is required on the lender’s part to ensure you will be able to repay the loan in time without defaulting.

  1. Credit History and Score

One of the most important parameters for personal loan eligibility is your credit score. A credit score reflects the borrower’s past credit history. It is an account that has information on your debt accounts, outstanding debts, and repayments of debt in the past. It is a way to ascertain the borrower’s repayment capability. A score above 750 is generally considered a healthy credit score. A lower credit score can get you a loan, but the interest rate charged will be higher. Hence, it is advised to improve your credit score before applying for a loan. This can be easily done by repaying outstanding debts, paying the EMIs on time, and not applying for multiple loans at the same time. You can also check loan eligibility online.

  1. Repayment History

The next parameter is your repayment history. Meaning, how regular you have been in clearing your debts in the past. This shows your credit management behaviour. Late payments and defaulting leave a bad impression on the lender. This can lead to rejection or make your chances of getting a personal loan a bit more difficult.

  1. Work Experience

Employment history plays a key role in bank loan eligibility. A lender or a bank will check how long you have been employed. Working with the same employer for a prolonged period or at a multinational or government organisation further improves your creditworthiness. If your work profile reflects stability, the chances are you might get a loan with lower interest rates.

  1. Age

As they say, “age is just a number,” but not in the case of personal loan eligibility. Your age can give an insight into your financial stability. People who are too young or too old may indicate unstable earning ability. Hence, most lenders prefer people between the ages of 23 and 55.

  1. Income

A regular inflow of income is a good sign for personal loan eligibility. It assures the lender of your repayment capability. It is best to mention your additional sources of income as well. This can include the spouse’s salary, rent from leased-out properties, business income, etc. Your income also plays a role in determining the amount of loan you can get.


Personal loans are an effective way of dealing with unforeseen emergencies. The above-mentioned points play a major role when applying for a personal loan. Lenders need to know your repayment capabilities before they loan you the amount. The whole process becomes hassle-free if you have a healthy credit history and CIBIL score. Your monthly income and employment history also play a crucial role. Understanding these requirements will not only improve your chances of getting a loan, but it may also help you get better interest rates. For more such blogs and other personal loan-related queries, head over to Piramal Finance.