Why Two People with the Same Salary Get Different Personal Loan Amounts?

A Personal Loan is sanctioned after evaluating multiple criteria to determine the eligibility of the applicant for the loan. So, two people with the same salary amount and working in the same firm might receive different Personal Loan offers from the same lender. This is because the final loan amount does not only depend on the income level of the applicant.

Let’s understand the process of Personal Loan evaluation and how applicants can align their financial profiles with approval requirements. After a thorough understanding, you’ll be able to position your profile strategically before applying for a Personal Loan.

Salary is the Starting Point, Not the Decision

Your salary is not the sole basis for performing Personal Loan underwriting. Lenders evaluate the net disposable income, which is the total amount available after deducting your existing financial obligations.

For example, two individuals having a salary of around Rs. 60,000 per month might have different repayment capacities. One person might not have any existing liabilities, while the other person may carry multiple EMIs for car or housing loans, or revolving credit balances. As a result, the latter profile will have reduced available income for the new debt servicing.

According to the Reserve Bank of India, the lending banks or companies must follow responsible lending practices by analysing the repayment capacity instead of prioritising the gross income alone. This helps ensure financial stability for both the loan applicants and the lenders.

Credit Score Drives Loan Outcomes

Your credit score is one of the most important parameters when evaluating Personal Loan eligibility. It presents a clear picture of your creditworthiness and repayment discipline.

A credit score of 750 and above is a good CIBIL score and increases the chances of approval for a Personal Loan at better terms. Studies also indicate that 79% of the approved loans are granted to applicants with a credit score above this threshold.

What builds your credit score:

• Timely repayments on all existing loans without exception
• Full credit card settlements rather than minimum due payments
• Clean loan closures with no defaults or settlements on record
• Low credit utilisation is consistently maintained below 30% of the limit

What pulls your credit score down:

• Late or missed payments on any active loan or credit card
• Settling a loan for less than the outstanding amount
• Consistently paying only the minimum due on credit card bills
• Multiple loan or credit card applications submitted within a short period

The stronger the applicant’s profile, the higher the sanctioned amount, the lower the interest rates on a Personal Loan and the faster the processing. A lower score could mean less money, a higher rate, or more conditions attached to the approval.

Read: Why missed payments impact your credit score quickly?

Debt-to-Income Ratio Defines Repayment Capacity

To determine the financial stability, the banks or the lending institutions calculate the debt-to-income (DTI) ratio. This ratio compares the total monthly debt obligations to the net monthly income.

All existing monthly commitments like current loan EMI’s, minimum credit card payments, fixed recurring debits are added and divided by the monthly take-home income. This gives the debt-to-income ratio, and most lenders keep a comfortable cut-off of 40 to 50%.

According to the industry benchmarks, for most lenders:

• A DTI of 36% or less is excellent.
• Between 37-43% is acceptable, but it makes the lender cautious.
• Above 50% can lead to loan rejection.

Consider this comparison:

Applicant A and Applicant C receive the same salary. The size of the loan given to each will vary greatly because the repayment capacity each offers the lender is fundamentally different.

The DTI plays a central role in Personal Loan calculation; the higher the DTI, the lower the chances of loan approval, even if the salary remains the same.

Read: How much Personal Loan can I get on a ₹25,000 salary?

Employment Consistency and Income Stability Carry Significant Weight

Leading banks and loan lending organisations evaluate employment consistency and income stability as important metrics for Personal Loan eligibility. A strong professional profile can help in reducing the perceived lending risk.

Several key evaluation factors include:

• Employer category: Applicants at established, listed organisations are viewed as lower risk due to perceived income stability.
• Length of service: Continuous employment of three to five or more years at the same organisation signals reliability.
• Nature of income: A fixed monthly salary credited consistently is easier to model for repayment risk than variable income.
• Self-employment considerations: Variable income requires a longer documented earnings track record across ITR filings and bank statements.

This does not imply that the applicants from small organisations or with less tenure cannot get good loan amounts. Other profile elements, such as a good credit score and low existing obligations, are proportionally important in offsetting a less-than-traditional employment history.

Age and Loan Tenure Directly Impact the Loan Amount

Age is a crucial factor that influences the maximum repayment tenure available to a loan applicant. Most lenders require the loan to be fully repaid before the borrower reaches 60 to 65 years of age.

The shorter tenure increases the EMI obligations, which can directly impact the loan affordability.

Example:

• Young applicants can easily qualify for longer tenures, leading to a lower EMI.
• The older applicants have comparatively shorter tenure, thus a high EMI.

Higher EMI means a lower affordability ratio, allowing lending organisations to sanction lower loan amounts when performing Personal Loan calculations.

Read: What is the maximum Personal Loan amount one can borrow in India?

Tips to Strengthen Financial Profile Before Applying

A well-structured financial profile has a significantly improved Personal Loan eligibility and enhanced approval outcomes. Applicants who want to align their financial position with the critical Personal Loan criteria can refer to the following tips:

• Check and Improve the Credit Score: Applicants can get scores from a number of free sites. Under 720 is worth three to six months of deliberate work before applying. During that period, they must pay off any overdue accounts, keep the credit card limit below 30% of the limit, and pay all current obligations on time.
• Optimise debt-to-income ratio: The DTI ratio can impact the repayment capacity; applicants must evaluate the existing financial commitments and ensure that the total obligations do not exceed 40% of the monthly income.
• Consistency in Salary Account Transactions: Lenders consider transactions on the main salary account. Irregular salary credits, large debits without explanation or frequent changes in the account add uncertainty to what would otherwise be a clear profile and can influence the outcome of the assessment.
• Use a Personal Loan EMI calculator: Use tools such as a Personal Loan EMI calculator to evaluate loan amounts and tenures. This will help applicants in determining a realistic borrowing range and better align finances with the lender’s obligations.

The Next Steps: After the Personal Loan Application is Submitted

Once the applicant submits a loan application with a strong financial profile, the lending organisation starts the evaluation process. Understanding these evaluation stages can allow applicants to track the application progress and act on the lender requirements quickly.

1. Application Review and Credit Assessment: The lending bank evaluates the applicant’s details, credit score, and repayment history.
2. Verification of the Documents and Income Validation: The bank performs income validation, bank statements, salary credits, employment stability, and financial behaviour.
3. Applicant’s Eligibility Evaluation and Loan Structure: After verification, the loan amount, interest rate, tenure, and EMI are finalised.
4. Loan Approval and Communication: Once the loan is approved, the lender shares a formal loan agreement with the applicant, outlining the terms and conditions.
5. Loan Acceptance and Disbursal: Upon acceptance, the applicant completes the loan formalities, and the funds are then disbursed to the designated account.
6. Financial Discipline: The loan borrower is required to maintain timely repayments. Consistent EMIs strengthen the credit score for future Personal Loan eligibility.

To Conclude

Identical salaries do not necessarily qualify for the same loan outcomes. Leading banks and lending organisations evaluate several factors, including repayment behaviour over time, existing obligations,  employment stability, employer profile, and even the age of the applicant.

A carefully planned and financially strong applicant profile can achieve favourable loan terms with competitive interest rates and flexible repayment options, even at higher approval loan amounts. Check your Personal Loan eligibility with Poonawalla Fincorp with the eligibility calculator and get a Personal Loan at competitive interest rates with flexible repayment terms.

FAQs

Why does the same salary result in different loan amounts at the same lender?

Salary is one of the many eligibility criteria for a Personal Loan. The sanctioned amount depends on credit score, existing EMI obligations, debt-to-income ratio, employer profile and eligible tenure, independently. Two applicants with the same salary but different profiles on these parameters will always get different outcomes from the same lender.

How does the debt-to-income ratio affect Personal Loan eligibility?

The debt-to-income ratio shows what percentage of monthly income is already committed to existing debt. Most lenders allow a DTI of 40%. If existing commitments take up a large share of income, the headroom for a new repayment is reduced, and so is the sanctioned amount that is offered.

Can improving my credit score change the loan amount I am offered?

Yes, in a meaningful way. A higher credit score means less risk of repayment for the lender, which also means a higher sanctioned amount and better rate of interest for a Personal Loan. This is because the rate greatly influences EMI affordability and thus, a better score can help increase both the interest rate and the approved amount at the same time.

Does the age of the applicant influence how much Personal Loan they can get?

The maximum loan tenure you are eligible for depends on your age, as most lenders prefer the loan to be fully paid off before you turn 60 to 65 years old. Longer tenure means lower EMI for any loan amount. Lenders will reduce the amount they sanction to ensure the repayment is within an acceptable range if the EMI is higher than the affordability assessed.

How can I use a Personal Loan EMI calculator to prepare before applying?

Personal Loan EMI calculator allows users to enter the loan amount, tenure and interest rate to calculate the corresponding monthly EMI. That figure, compared to your current commitments, can help you determine a realistic loan amount before you apply.