How Do Banks Decide Loan Eligibility?

Ever wondered why one person gets instant loan approval while another faces rejection, even with a similar salary? The answer lies in loan eligibility assessment.

Banks and NBFCs follow structured risk evaluation models before approving personal loans, home loans, or business loans. They assess your income, credit score, existing EMIs, job stability, and more.

At Saarathi.ai, we have observed that many borrowers assume eligibility depends only on salary. In reality, lenders evaluate multiple factors to determine your repayment capacity and creditworthiness. In this guide, we break down exactly how banks decide loan eligibility in India.

What Is Loan Eligibility?

Loan eligibility refers to the maximum loan amount and terms a lender is willing to offer you based on your financial profile.

Lenders regulated by the Reserve Bank of India must follow responsible lending guidelines and assess repayment capacity carefully.

Eligibility determines:

• Loan amount approved

• Interest rate offered

• Loan tenure

• Need for guarantor or collateral

Key Factors Banks Use to Decide Loan Eligibility

1. Credit Score and Credit History

Your credit score is one of the first filters.

Banks check your credit report from TransUnion CIBIL to review:

• CIBIL score

• Past repayment behaviour

• Missed EMIs

• Loan settlements

• Credit card utilisation

Generally:

• 750+ score improves approval chances

• Below 650 may reduce eligibility

At Saarathi.ai, we have seen that even a 50-point improvement can significantly change loan offers.

2. Monthly Income

Income indicates repayment capacity.

For salaried applicants, banks check:

• Salary slips

• Bank statements

• Employer category

For self-employed applicants:

• ITR filings

• Profit and loss statements

• GST returns

Higher income usually means higher loan eligibility, but it is not the only factor.

3. Debt-to-Income Ratio

Banks calculate how much of your income is already committed to EMIs.

Ideally:

• Total EMIs should not exceed 40 to 50 percent of monthly income

If your income is Rs 60,000 and existing EMIs are Rs 30,000, eligibility may be restricted.

4. Employment Stability

Banks prefer:

• Salaried individuals with at least 1 to 2 years of work experience

• Self-employed individuals with stable business history of 2 to 3 years

Frequent job changes may impact eligibility.

5. Age of Applicant

Age determines the repayment window.

For example:

• Personal loans typically require age between 21 and 60

• Home loans may extend up to retirement age

Younger borrowers may get longer tenure options.

6. Type of Loan

Eligibility differs by loan type:

• Personal loans are unsecured and require stronger credit profile

• Home loans are secured, so eligibility may be higher

• Business loans depend on cash flow

Each loan category has different risk parameters.

7. Loan Tenure Chosen

Longer tenure reduces EMI and increases eligibility.

However, it increases total interest paid.

Choosing the right tenure is a balance between affordability and cost.

8. Employer Profile or Business Category

Banks classify employers into:

• Government

• PSU

• MNC

• Private limited

• Small enterprises

Applicants working in reputed organisations may receive better eligibility.

How Technology and AI Are Changing Eligibility Decisions

Modern lenders use:

• AI-based underwriting models

• Automated income analysis

• Digital document verification

Financial coverage by The Economic Times highlights how digital lending platforms are reducing manual bias in eligibility decisions.

At Saarathi.ai, our AI-powered Recommendation Engine analyses your profile and matches you with lenders most likely to approve your loan. This reduces unnecessary rejections and credit enquiries.

How Banks Calculate Maximum Loan Amount

For salaried individuals, a common method is:

Eligible EMI = 40 to 50 percent of net monthly income

Then EMI is converted into loan amount based on interest rate and tenure.

Example:

If your net monthly income is Rs 80,000
Maximum EMI allowed may be around Rs 35,000

Based on interest rate and tenure, the bank calculates the loan amount.

This is why two people with same salary may get different loan offers depending on:

• Credit score

• Existing EMIs

• Tenure preference

Common Reasons for Loan Rejection

• Low CIBIL score

• High credit card utilisation

• Multiple recent loan enquiries

• Incomplete documentation

• Unstable income

• High existing EMIs

Many borrowers apply to multiple banks after rejection, which further impacts credit score.

Instead, you can compare personal loan offers on Saarathi.ai and view suitable lenders before submitting formal applications.

How to Improve Loan Eligibility

1. Improve Credit Score

Pay EMIs on time and reduce credit card utilisation.

2. Reduce Existing EMIs

Close small loans before applying for new ones.

3. Increase Loan Tenure

Longer tenure reduces EMI and improves eligibility.

4. Add Co-Applicant

Especially useful for home loans.

5. Maintain Clean Banking History

Avoid cheque bounces and irregular salary credits.

Does Checking Eligibility Affect Credit Score?

Hard enquiries from lenders can affect your score.

However, using platforms that provide smart matching reduces unnecessary enquiries.

At Saarathi.ai, you can ask eligibility questions via Saarathi AI experts and explore options strategically.

How Saarathi.ai Simplifies Loan Eligibility Check

Saarathi.ai is an AI-powered digital lending marketplace connecting borrowers with 110+ banks and NBFCs.

With Saarathi.ai, you can:

• Check eligibility instantly

• Compare multiple lender offers in one place

• Get AI-driven personalised recommendations

• Track applications in Saarathi Bazaar dashboard

• Experience a 100 percent paperless process

Instead of guessing your approval chances, you get clarity upfront.

Quick Summary: What Banks Check

FAQs

1. What is the minimum CIBIL score required for loan eligibility?

Usually 700+, but 750+ improves approval chances significantly.

2. Can I get a loan with low income?

Yes, but the eligibility amount may be lower.

3. Does salary alone determine eligibility?

No. Credit history and existing EMIs are equally important.

4. How can I increase my loan eligibility quickly?

Reduce debt, improve credit score, and choose longer tenure.

5. Does checking loan eligibility affect credit score?

Only if a hard enquiry is made. Smart comparison reduces unnecessary checks.

Conclusion

Banks decide loan eligibility based on multiple financial factors, not just salary.

Remember:

• Credit score plays a major role

• Debt-to-income ratio impacts approval

• Stable income improves eligibility

• Strategic comparison prevents rejection

Before applying, understand where you stand.

Discover personalized loan options on Saarathi.ai today and check your eligibility with AI-powered precision and transparency.