How to calculate loan eligibility like banks? Check this online loan eligibility calculator.
But before that, lets try to understand its requirement.
What is the need for a loan eligibility calculator?
It helps us to plan our loan proceedings.
Let it be personal loan, home loan, education loan etc, preparedness is important.
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One must be prepared for what? For following three things:
- How much to save for loan?
- How much will be the cost of loan (interest)?
- What is the maximum loan eligibility?
#1. How much to save?
This is perhaps the most important thing one must be prepared for, before applying for loan.
Because once the loan will start, EMIs must be paid each month.
These EMIs will be the extra cost (compared to today).
How to pay the EMI? EMIs can be paid only from the savings.
So the important question is, how much one can save?
There are two parts to it:
- Bank’s assumption about your savings.
- Your’s self calculation.
The way bank’s calculate ones saving, will be explained in this article.
But the best way forward is, the borrower must estimate ones loan payment capability by self.
The accurate will be the self-estimation, easier will be the EMI payments in times to come.
[Read more: What happens if personal loan is not paid in India]
#1.1 How banks calculate Savings?
Generally banks consider 50% of income as “Net savings”.
But this 50 percentage point is like a maximum value.
It is not applicable for all people.
For people who earn less, this percentage points is lower.
What does it mean? Example:
A person earning Rs.100,000 per month may be eligible for 50% savings points.
Another person earning Rs.50,000 per month may be eligible for lesser savings points.
It is essential for banks to estimate the borrowers net savings accurately.
A wrong estimation may lead to non payment of EMIs and bad debt.
Hence banks take extra care to calculate net savings.
But a common man must note 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.
How banks estimate net savings?
(1) Note down income (Rs./month)
(2) Savings – 50% of Income.
P.Note: For lower income levels, lower percentage points will be used for calculation.
(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 EMIs paid each month.
(5) Take a note of house rent paid each month.
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 – (Minimum Payment + EMI + Rent)
#2. Estimate Maximum Loan Eligibility?
To estimate this, one must first know the cost of loan (interest).
Get a quote from banks for the interest they charge on loans.
Currently, following interest rates are valid for SBI (approx):
- Home Loan: 8.25% (< Rs.30 Lakhs).
- Car Loan: 9.5%.
- Personal Loan: 11.75%.
- Education Loan: 10.5%.
These are rates for State Bank of India (SBI).
Similarly, get the applicable rate for your type of loan.
Keep a note of it.
#2.1 Formula for estimating Loan Eligibility
I will suggest you to use this loan eligibility calculator for estimation.
In case your want to do it manually, here is the formula.
Loan Eligibility = Net Savings / EMI Per Lakh X 100,000
- Net Savings = Rs.30,000
- Loan Interest Rate = 9.5% p.a.
- Loan Tenure = 7 years.
- EMI Per Lakh Loan = Rs.1,635
Loan Eligibility = Net Savings / EMI per lakh X 100,000
= 30,000 / 1,634 x 100,000 = Rs.18,35,000
There is another important factor that must be considered in the process of estimating ones loan eligibility.
It is called 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.
Note for self employed people:
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 “this document” handy. Which document?
If a self employed person can produce this document to bank, along with the bank statement, it should be enough to work as an income proof.
Documents that may be required for loan:
- 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).