How much personal loan can I get on my Salary?

Discovering the maximum personal loan amount that you can get based on your current salary is a crucial aspect of informed financial decision-making. Your salary serves as a foundational criterion that lenders scrutinise to determine your borrowing capacity.

By understanding this correlation, you can proactively assess your eligibility for a personal loan, avoiding overcommitment and fostering financial prudence.

In this article, we will look at the relationship between your income and potential loan amount and discuss how lenders evaluate risk and repayment capacity. We will also explore key factors that influence the loan amount such as credit scores and existing financial obligations.

Let’s find out more about the factors that can help you navigate the personal loan landscape astutely, ensuring that your borrowing aligns harmoniously with your financial circumstances and aspirations.

Factors Affecting Personal Loan Eligibility

Listed below are the factors that affect your personal loan eligibility -

• Debt Burden Ratio (DBR) - Prior to applying for a personal loan, you must understand your DBR (Debt Burden Ratio). This can be computed by determining the percentage of your existing debt in relation to your current income. This calculation will provide insight into the impact of liabilities on your earnings. Maintaining a lower DBR enhances your likelihood of loan approval. The Central Bank of the UAE has mandated that financial institutions cannot approve a Debt Burden Ratio exceeding 50%. Consequently, your borrowing capacity is constrained to a maximum of 50% of your income or salary.
• Your Salary Amount and Constant Salary Transfers - Banks in the UAE usually offer two types of personal loans: Salary Transfer Personal Loans and Non-Salary Transfer Personal Loans. Opting for the salary transfer option requires you to provide a salary assignment letter following specific formats outlined by the banks. This choice enables you to access lower interest rates and secure the highest possible loan amount available from the bank.
• credit Score and Credit Report - The al etihad credit bureau aggregates credit-related information from various lending institutions to generate a credit report and assign you a credit score between 300 and 900. This report contains details of your recent credit activities and liabilities, highlighting any instances of missed payments. All UAE banks assess your creditworthiness by reviewing your credit report and credit score before granting approval for a personal loan.

  

• Age - The majority of banks and financial institutions have established a uniform set of age requirements for loans. To qualify for a personal loan, the applicant should be at least 21 years old, although a maximum age limit of 60 years will be applicable as well. These age prerequisites are predominantly applicable to expatriates seeking personal loans. UAE citizens, for instance, have the opportunity to apply for loans in Dubai until they reach the age of 65 years.
• Employment Status - The lender's decision regarding your loan application can be influenced by your employment status as well as your employer's reputation. If you have a long-standing employment history with a reputable company, your chances of getting your personal loan application approved increase significantly.

Lenders generally favour applicants who have maintained employment within the same organisation for a period of 2 years or more as it demonstrates consistent income and employment stability. Thus, if you frequently change jobs, lenders might view this as a concerning sign, which can potentially affect your eligibility for the loan.

Ways to Estimate the Personal Loan Amount

Let’s discuss the two major methods to compute how much personal loan can you get on your salary -

Multiplier Method

This is one of the most common approaches for calculating the personal loan amount. Here, banks employ a factor to your net monthly salary to determine the potential amount you can borrow. If your salary is substantial and your company enjoys a strong reputation, the multiplier factor (and consequently your borrowing capacity) is elevated.

Typically, banks use factors ranging from 9 to 22, with these values tailored to various salary tiers and the bank's internal classification of companies. The more elevated the company's classification, the greater the borrowing limit and the lower the interest rate for personal loans.

Here’s how the loan amount is calculated -

Loan Eligibility = Your Net Monthly Salary x Multiplier Set by the Bank

Fixed Obligation Income Ratio (FOIR)

Using this approach, your eligibility for a loan amount is determined based on the highest EMI or monthly instalment that you can manage, taking into consideration your net income after deducting other consistent expenses like rent and existing EMIs.

Banks consider a specific portion of your monthly net salary as Equated Monthly Instalments (EMI) along with your current fixed financial responsibilities and any outstanding credit card dues. If these obligations surpass the bank's established criteria, the bank will either decrease your loan amount or extend the duration of your loan.

Banks compute your eligibility in a way that ensures your fixed commitments (including the EMI for the new loan) don’t surpass 50% of your income.

The formula for calculating the personal loan amount using the Fixed Obligation Income Ratio (FOIR) is as follows -

FOIR = (Sum total of the existing financial obligations/Net monthly take-home salary) x 100

Tips to Be Eligible for a High Personal Loan Amount at an Affordable Interest/Profit Rate

While getting a personal loan is a relatively straightforward process, there are certain essential points to bear in mind prior to initiating your personal loan application. Presented below are some useful pointers to remember when you embark on your quest for a personal loan - 

• Assess Your Requirements Prior to Obtaining a Loan - Before committing to a loan, evaluate the precise purpose for which you need the funds. Each loan signifies an obligation to pay monthly instalments (EMIs) over a stipulated loan term, adding to your forthcoming budgetary commitments. It is imperative to ascertain whether the loan you intend to secure serves a productive objective. For instance, if you are seeking a personal loan to finance a vacation while you have outstanding credit card debt to settle, this approach could lead to further outstanding debt. Ultimately, you must ensure that your loan funds are utilised in a constructive manner.
• Conduct Thorough Research - Before finalising a loan arrangement with a lender, perform comprehensive research to explore the full spectrum of available options. Refrain from hastily opting for the first lender who extends a personal loan proposition. By engaging in a diligent search, you enhance your likelihood of identifying a lender who could potentially offer a lower interest rate and more favourable terms for the personal loan. Additionally, verify that the chosen loan aligns with your specific requisites.
• Impact of Credit Scores on Personal Loans - Your credit score possesses the potential to either bolster or undermine your prospects of securing a personal loan. Given the unsecured nature of these loans, lenders are exposed to elevated risk levels. Consequently, applicants with higher credit scores are typically favoured, as such scores indicate better repayment capacity on the part of the borrower. Before applying, it is necessary to gauge your repayment potential by checking your credit score. A credit score of 750 or above substantially improves your chances of obtaining a personal loan with a lower interest rate and advantageous terms.
• Correlation Between Low Credit Scores and Elevated Interest Rates - If your credit score is subpar and you succeed in finding a lender willing to extend a personal loan, be prepared to contend with a relatively elevated interest rate. A diminished credit score functions as a cautionary signal that lenders are inclined to steer clear of, as it indicates limited repayment capacity or an unfavourable history of repayment. Furthermore, even if you secure a personal loan with a low credit score, the sanctioned amount might be less than your requested sum, not to mention the more stringent loan terms.

  

• Comparative Assessment of Interest Rates - Given that personal loans lack collateral, they typically involve higher interest rates than other types of loans. Consequently, prior to availing yourself of a personal loan, it is advisable to explore interest rate offerings from multiple lenders. This approach enables you to identify the lender presenting the most competitive interest rate, coupled with favourable terms.
• Scrutinise Your Eligibility - Before initiating your personal loan application, ascertain your eligibility criteria with the lender, particularly with respect to your income and employment status. Income represents an important criterion followed by lenders during the approval process, as it serves as an indicator of your financial capability to meet the loan repayment obligations.
• Inquire About Pre-Payment Options - Numerous lenders afford borrowers the option to pre-pay their loans, albeit with additional charges. While finalising your lender selection for a loan, it is prudent to inquire about the feasibility of loan pre-payment. Opting for loan pre-payment can yield substantial savings by mitigating the impact of the otherwise high interest rate.
• Exercise Caution Against Multiple Loan Applications - Submitting loan applications to various lenders within a brief timeframe can potentially have a detrimental effect on your credit score. Such behaviour may prompt lenders to perceive you as financially strained and incapable of fulfilling your loan obligations. Moreover, each application results in hard inquiries. While one inquiry may not impact your score much, multiple ones at a time can lead to a decline in your credit score. This, in turn, can be disadvantageous when seeking credit both presently and in the future.
• Thoroughly Review Your Credit Report - Prior to commencing your personal loan application, ensure a comprehensive review of the contents of your credit report. Verify the accuracy of the information reflected in your credit report, confirming its alignment with your repayment history. Even minor inaccuracies in credit score calculation can have negative repercussions, potentially resulting in credit request denials down the line. Should any discrepancies be identified, prompt rectification is essential.
• Observe a 6-Month Waiting Period for Reapplication - In case a lender rejects your loan application, it is advisable to exercise patience and wait for at least 6 months before reapplying for a loan.

Should your loan application encounter rejection due to an unfavourable credit score, utilise this six-month period to enhance your score by fulfilling outstanding payments. Pursuing alternate lenders immediately after a rejection is often futile — subsequent rejections can lead to a deterioration in your credit score.