Salary vs Loan Amount: Loan Eligibility for ₹25K, ₹50K & ₹1 Lakh Salaries

Ravi is a young professional in Kochi, earning ₹50,000 per month. He dreams of owning a home but wonders how much loan he can secure with his salary. Understanding the relationship between income and loan eligibility is essential when planning financial commitments like purchasing a house or funding education. 

Lenders assess various factors to determine loan amounts, with monthly income being a primary consideration. For instance, if your net monthly income is ₹50,000, you might be eligible for a home loan up to approximately ₹37.28 lakh, assuming no other financial obligations.

Similarly, with a monthly salary of ₹25,000, the eligible loan amount could be around ₹18.64 lakh. It's essential to note that lenders typically ensure that total monthly EMIs do not exceed 50% of your net take-home salary.

This means that for a ₹1,00,000 monthly income, your maximum EMI should ideally be within ₹50,000, influencing the loan amount you can obtain. Understanding these dynamics helps make informed financial decisions and set realistic expectations for loan approvals.

Assessing Loan Eligibility Based on Income

When you apply for a loan, the first question banks ask is, “How much can you afford to repay every month?” Your income plays a huge role in answering this question. Let's explain how income affects loan eligibility and what you need to know before applying.

How Banks Check Your Loan Eligibility

Banks use a simple Fixed Obligations to Income Ratio (FOIR) rule. This checks how much of your income is committed to other expenses like existing loans or EMIs (Equated Monthly Installments). 

Generally, banks prefer that your total EMIs do not exceed 40-50% of your net monthly income.

Example:

• Your net monthly income: ₹50,000
• Maximum EMI limit (50% of income): ₹25,000

So, based on your income alone, your total loan EMIs should not exceed ₹25,000 per month.

However, this number also depends on other factors like your credit score, existing debts, and the type of loan you are applying for.

Understanding EMI and Its Impact on Loan Amount

An EMI (Equated Monthly Instalment) is the fixed monthly amount you pay towards your loan repayment. It covers two parts:

1. Principal Amount: The actual loan amount you borrowed.
2. Interest: The extra amount you pay the bank to lend you money.

The EMI depends on:

• The loan amount you borrow
• The interest rate applied by the bank
• The loan tenure (how many months/years you’ll take to repay the loan)

Simple Example of EMI Calculation

Suppose you borrow ₹5,00,000 at an interest rate of 10% per annum for 5 years (60 months).

Using an EMI calculator, your monthly EMI would be around ₹10,624.

If your income is ₹50,000 per month, this EMI is affordable since it’s under the ₹25,000 EMI limit (50%).

Read More - Personal Loan Without Income Proof

How EMI Affects Your Loan Eligibility

Note: The loan amount increases with higher income since your EMI limit also increases.

Role of Credit Score in Loan Approval

Your credit score is between 300 and 900, which shows how good you are at repaying debts. A higher score means a better chance of getting a loan.

• 750 and above: Excellent (Higher chance of approval, lower interest rates)
• 650-749: Good (Eligible, but with standard interest rates)
• 600-649: Average (Loan approval possible but at higher interest rates)
• Below 600: Poor (Very low chance of loan approval)

Let’s say Rohit and Amit both apply for a ₹10 lakh personal loan:

• Rohit has a credit score of 800.
  • Gets approved quickly.
  • Receives a 10% interest rate.
  • EMI: ₹21,247 (for 5 years)
    
    
• Amit has a credit score of 620.
  • Gets a higher interest rate of 14%.
  • EMI: ₹23,268 (for 5 years)

Even though both of them borrow the same amount, Amit ends up paying ₹1,22,520 more than Rohit over five years due to a higher interest rate.

Tips to Improve Loan Eligibility

1. Increase your income: A second job, freelancing, or side hustle can boost your eligibility.
2. Clear existing debts: Pay off credit card bills and old loans to reduce your fixed obligations.
3. Improve your credit score: Pay EMIs and bills on time, and avoid maxing out credit cards.
4. Opt for a joint loan: Adding a co-applicant (like a spouse or parent) increases eligible income.
5. Choose a longer loan tenure: Lower EMIs for longer terms increase your eligibility, but you may pay more interest.

Understanding Loan Eligibility: Factors You Should Know

When you apply for a loan, banks don’t just look at your income—they also check your current financial responsibilities, the loan tenure you choose, and the type of loan you need. 

Let’s break these factors down in simple terms to help you understand how they affect your loan chances.

Impact of Existing Financial Obligations

Your existing financial obligations are any debts or payments you’re already committed to. These include:

• EMIs for personal, car, or home loans
• Credit card payments
• Other monthly fixed obligations like rent or insurance premiums

Banks use the Fixed Obligations to Income Ratio (FOIR) formula to decide if you can handle a new loan. Most banks prefer if your total EMIs (including the new loan) stay below 40–50% of your monthly income.

• Your net monthly income: ₹60,000
• Existing EMI for car loan: ₹10,000
• Maximum allowed EMI (50% of income): ₹30,000

So, the new loan EMI cannot be more than ₹20,000 (₹30,000–₹10,000) since you’re already paying ₹10,000 towards your car loan.

How Existing Obligations Affect Loan Eligibility

Example:

Priya, a young professional, earns ₹80,000 a month. She already pays ₹20,000 EMI for her home loan. When she applied for a car loan, the bank limited her EMI to ₹20,000 to ensure she could manage repayments comfortably. 

This rule protected her from falling into a debt trap.

Loan Tenure and Its Effect on Eligibility

Loan tenure is the time you take to repay your loan. You can choose short or long repayment periods based on what suits your budget. A longer tenure means smaller EMIs, but you’ll pay more interest overall. A shorter tenure means higher EMIs but lower total interest paid.

How Tenure Affects EMI and Eligibility

Suppose you need a ₹10,00,000 loan at 10% interest per annum.

Key Insight:

Choosing a longer tenure reduces your monthly EMI, making it easier to manage repayments. However, you’ll end up paying more in interest over time.

Also Read - Salaried vs Self-Employed

Example:

Ramesh, who runs a small business, chose a 7-year tenure for his business loan. This lowered his monthly EMI to ₹16,608, allowing him to invest more money back into his business each month, even though the total repayment amount increased.

Differences Between Various Types of Loans

There are many types of loans, each designed for different purposes. Here’s a breakdown of the most common ones:

Key Differences:

1. Interest Rate:
   • Home loans usually have the lowest rates since they’re secured by property.
   • Personal loans have higher rates because they’re unsecured.
     
     
2. Collateral:
   • Secured loans like home and car loans require collateral.
   • Unsecured loans, like personal loans, don’t need any assets as security.
     
     
3. Tenure:
   • Home loans can go up to 30 years, reducing your EMI.
   • Personal and business loans usually have shorter terms.

Government Schemes and Subsidies Available

The Indian government offers various schemes and subsidies to help citizens afford loans. These are especially helpful for buying homes, starting businesses, or pursuing higher education.

Popular Government Loan Schemes

1. Pradhan Mantri Awas Yojana (PMAY):
   • Helps people buy affordable homes.
   • Offers interest subsidies of up to 6.5% for lower-income groups.
   • Maximum loan amount eligible for subsidy: ₹6 lakh.
     
     
2. Mudra Loan Scheme:
   • Supports small businesses.
   • Loans of up to ₹10 lakh available without the need for collateral.
   • Divided into three categories:
     
     
     • Shishu: Up to ₹50,000
     • Kishor: ₹50,001 to ₹5 lakh
     • Tarun: ₹5,00,001 to ₹10 lakh
       
       
3. Stand-Up India Scheme:
   • Supports women and SC/ST entrepreneurs.
   • Loans between ₹10 lakh to ₹1 crore for starting a business.
     
     
4. Education Loan Subsidy:
   • For economically weaker sections.
   • Reduces interest burden on education loans for higher studies in India and abroad.
     
     

Example of Subsidy (PMAY):

Imagine you take a loan of ₹6 lakh under the PMAY scheme with a subsidy rate of 6.5%.

• Normal loan EMI at 8% interest: ₹5,019 (for 20 years)
• EMI after subsidy at 1.5% effective interest: ₹3,873 (for 20 years)

Savings: You save around ₹1,146 per month, or over ₹2.75 lakh over the loan tenure.

Anita, a school teacher, wanted to buy her first home. Her income was limited, but thanks to the PMAY scheme, she got an interest subsidy of 6.5% on her ₹6 lakh loan. This reduced her EMI by ₹1,000 per month, allowing her to afford home ownership without financial stress.

Benefits of Using Government Schemes

1. Lower Interest Rates:
   Most schemes offer reduced interest rates, making loans affordable.
   
   
2. Reduced Financial Stress:
   Subsidies ease the burden of repaying large loans.
   
   
3. Encourages Entrepreneurship:
   Business loan schemes help small businesses grow by providing funds without collateral.
   
   
4. Helps First-Time Buyers:
   Schemes like PMAY support first-time homeowners, especially in rural and semi-urban areas.

Conclusion 

Assessing loan eligibility is not just about your income; your EMI capacity and credit score matter just as much. Keep your finances in check, repay debts on time, and maintain a healthy credit score to improve your chances of getting the best loan offers.

A well-planned loan helps you achieve your dreams and keeps your financial future secure.

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LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?