How Much Personal Loan Can I Get On Rs 40,000 Salary?

Personal loans are among the most popular debt products because of a quick and easy application process and their utility in covering a range of personal expenses.

Several banks, non-banking finance organisations, and modern fintech lenders provide unsecured personal loans to borrowers with strong credit histories and strong payback capacities.

However, prospective borrowers must satisfy the eligibility requirements and minimum income requirement set by the lender in order to apply for a personal loan. The most common eligibility requirement relates to the monthly income or salary of the applicant—in general, a majority of lenders stipulate that applicants must make a minimum monthly salary of Rs 15,000 to be eligible, though this limit may vary from lender to lender.

Due to the fact that personal loans do not require any kind of collateral, lenders regard low-income borrowers as risky customers and offer them loans at exorbitant interest rates. While monthly income plays a key role in establishing eligibility for personal loans, lenders also check the borrowers’ credit score before making a decision.

So, if a person already meets the minimum eligibility requirement, the chances of a lender approving their loan application are greater. But how exactly does a bank or an NBFC decide on the loan amount and much loan can a person with income of Rs 40,000 get?

Personal Loan Amount

In general, the amount of personal loan depends on a person’s income, expenses, existing loan obligations and credit score. Broadly speaking, banks and non-banking finance companies use two methods to calculate the amount they sanction to an individual seeking a personal loan. The first is the multiplier method while the second takes into account the Fixed Obligation Income Ratio or the EMI/NMI ratio, or the ratio of the equated monthly installment to the net monthly income of the borrower.

In the multiplier method, lenders usually sanction an amount that is a multiple of the monthly income. This multiple can range from 10 to 20 times, or even higher in some cases. Essentially, this means that a person with a monthly income of Rs 40,000 will be eligible for a loan amount of anywhere between Rs 4 lakh and Rs 8 lakh.

The multiple will be higher for people with high credit scores above 750, and lower for those with weaker scores. Moreover, the multiple will be higher for borrowers with a low debt-to-income ratio and vice versa.

The Fixed Obligation Income Ratio (FOIR) and the EMI/NMI ratio consider not only the borrower’s income but also their expenses. These ratios indicate the borrower’s disposable income and the repayment capacity, and so are important factors in deciding the loan amount.

The FOIR and the EMI/NMI ratio are calculated by taking into account all fixed monthly expenses including rent or home loan EMIs, other loan EMIs, credit card bills as well as the net monthly income after making statutory deductions such as provident fund. Most lenders want these ratios to be no more than 40-50%.

Basically, this means that a prospective borrower’s EMI, both for existing and new loans, should not be more than 40-50% of the net monthly income. So, with a monthly income of Rs 40,000, the EMI should not exceed Rs 20,000. Depending on other factors such as the interest rate, tenure and credit score, the loan amount could be anywhere between Rs 2 lakh and Rs 10 lakh.

Tenure, Interest Rate, Credit Score

The tenure of the personal loan could range from a few months to five years or even more. The interest rates, too, vary from lender to lender and differ for borrowers, depending on their incomes, credit scores and other parameters. In general, the interest rates range between 10% and 35% on the personal loan. Lenders provide loans at a higher rate of interest to those with weaker credit scores and a lower rate to individuals with a high credit score.

The credit score indicates a person’s creditworthiness and is calculated based on credit history such as previous or existing loans and repayments. The score ranges from 300 to 900, with a score above 750 depicting strong creditworthiness. On the other hand, a score below 550-600 makes it difficult to get a loan.

Conclusion

Banks and NBFCs consider several factors while sanctioning a personal loan, and the monthly income is just one of those parameters. The prospective borrower’s credit score, monthly expenses, other running loans and tenure also influence the loan amount and repayment terms such as the interest rate.

While borrowers with a monthly income of up to Rs 40,000 may not automatically fall into the high-risk category, most lenders would do their due diligence before lending to this segment of customers. In general, people with monthly income of Rs 40,000 can expect to get a loan of Rs 4-8 lakh, provided they have a high credit score, no current EMIs and meet other eligibility criteria of lenders.

However, before applying for a loan application, borrowers should research the lenders’ interest rates and other terms and conditions. Importantly, one should borrow only from reputed banks or NBFCs such as IIFL Finance to avoid any hassles.

IIFL Finance, for instance, approves personal loans via a fully digital process that requires minimal paperwork. The company, one of India’s largest NBFCs, offers personal loans starting at Rs 5,000 and up to Rs 5 lakh for tenure ranging from three months to three and a half years.