A personal loan is an ‘unsecured loan’ – which means that you do not need to provide your lender any asset (like a house or car) as security when you borrow the money. A personal loan is a risky loan for lenders because they do not have any collateral to safeguard their money in case the customer defaults. Since it is a relatively high risk loan ( compared to housing, gold or auto loans)  lenders are careful about what kind of customer they will approve the loan for, the interest rate they will charge, the loan amount and the tenure – all so that they can minimise their risk.

What is the typical amount sanctioned for a personal loan?

The most important factors that determine your loan amount are your credit score and your income. There is no typical loan amount on a personal loan. A personal loan can range from a few thousands to tens of lakhs and each lender will have their own minimum and maximum amounts.

Tips to keep in mind when deciding what loan amount to apply for:

1.If you have a good credit score (750 or above) you have a good chance of being approved for a larger loan amount. A good credit score signifies that you have made repayments on past and current loans on time. Lenders will view you as a low-risk customer and be willing to lend a larger amount than if you had a lower score.

2.It is advisable not to apply for an amount that is very high and will be difficult to repay on your existing income. There is a good chance that your application will be rejected if the lenders think that you will not be able to sustain your EMI payments for the entire duration of the loan on your present income.  So when applying for a personal loan, make sure that the amount that you apply for is not a large percentage of your annual income.

3.Your employment is also an important factor in the loan-approval process and the decision on  the loan amount. Since personal loan customers do not provide any collateral, lenders need to make sure that you will have a steady monthly income over the loan period. That is why they pay particular attention to your employment status. They will look at whether you have stable employment and have been in the same job for a certain amount of time. Someone who has a history of frequently changing jobs might not be readily approved for a personal loan as it signifies that he/she might not have a stable or predictable salary over the loan period and might not be able to make regular payments. It is probably a good idea to be in a job for at least a year before you apply for a personal loan.

4.Your EMI payment record is also of importance. Lenders will look at your credit report to check if you have consistently demonstrated financial discipline and a pattern of timely EMI payments on your other loan obligations. If they see that you have regularly made payments and fulfilled your debt obligations, they will be inclined to view your loan application more favourably and might approve of a larger amount.

Of course, the final loan amount that is approved depends on the lending criteria used by the lender and how they evaluate your ability and willingness to repay the loan.