How the bank calculates loan eligibility?

THE amount you can borrow depends on how much you can afford to repay per month in EMIs or Equated Monthly Instalments. What the bank calculates is 'how much you can afford to repay'.

  

THE amount you can borrow depends on how much you can afford to repay per month in EMIs or Equated Monthly Instalments. What the bank calculates is 'how much you can afford to repay'.

Here is how they do it:

Step 1

A bank will start by looking at your income statement (salary slips, tax returns, bank statements). It will calculate your total monthly income by adding up your salary, interest income, rental income, if any etc. All these details are available in your bank statement.

Step 2

It will then calculate the amount you save.

Since savings depend on a variety of factors like income level, lifestyle etc, there is a standard thumb rule of 30 per cent that banks apply to arrive at this number.

That means, if your income is Rs 50,000 per month, the bank assumes that you save 30 per cent, that is Rs 15,000 per month.

The higher your income, the more you can save, so it is assumed.

Step 3

If you are already paying some other EMI, that amount will be reduced from the calculated savings. So if your savings per month is Rs 15,000 and you are paying an EMI of Rs 2,400 on your car loan, the bank will arrive at a figure of Rs 12,600 as your net savings.

Step 4

After that, a little backward calculation is done to find out the amount of loan that would result in an EMI equal to the amount that you can save. The bank uses the latest interest rate to calculate this.

So if your monthly net savings is Rs 12,600, the bank assumes that that is the amount available to pay off the EMI. If the prevailing interest rate is 10 per cent and you have applied for a loan tenure of 10 years, you will be eligible for a loan of Rs 9.5 lakh.

Happy Investing

Source:Moneycontrol.com