Why Is Gross Income Important While Taking A Personal Loan?

Personal loan is a versatile and quick solution to fund an individual’s financial requirement. It is increasingly becoming popular due to its easy and faster availability with minimum documentation. It is an unsecured loan which requires no asset mortgage as collateral. The loan amount granted can be used for any financial purpose like wedding, vacation, medical emergency, unforeseen expenses, debt consolidation, home renovation, etc. The interest rate at which a personal loan will be available to an individual depends upon many factors. Gross income is one of the most critical factors. Gross income refers to an individual’s total income from all sources before any deductions like taxes, insurance premiums, EMIs etc. Gross income plays an important role in availing a personal loan because lenders use the figure to determine borrower’s loan repayment capability, personal loan eligibility and calculate interest rate and loan amount. To understand the importance of gross income for personal loan, we need to understand the factors that affect the calculation of interest rate.

The factors that affect the calculation of interest on personal loan

• Gross Income – Gross income helps determine the repayment capability of the borrower. The higher the gross income, the higher are the chances of the loan being repaid Hence, the lower the interest rate. Some lenders also have minimum gross income eligibility criteria to avail the loan. The borrower will get the loan at an affordable and attractive rate if this eligibility criterion is met by the borrower.
• Credit score – A credit score is a three digit number representing a borrower’s creditworthiness. Credit score also helps assess the lender’s lending risk and is dependent upon borrower’s past credit record. Higher credit score attracts loans at a lower rate of interest.
• Employment history – A stable job indicates a reliable source of income thus increases the chances of repaying the loan. Such borrower’s will have the chances of getting lower interest rate on their loan.
• Existing debt – Lenders evaluate the other existing debts of the borrower to determine the capability of handling a new debt. High numbers of debts imply that the borrower has less chances of repaying the new debt. Thus it will be available at a higher rate of interest.
• Lender’s policies – Each lender have their own eligibility criteria and give importance to certain factors. Some lenders prefer giving importance to gross income while others may choose credit score as the most important factor.  Learn difference between private income and personal income.

How does gross income affect personal loan?

Various aspects of personal loan impacted by gross income are listed below:

• Personal loan eligibility – Lenders use gross income to assess the repaying capacity of the borrower. Often lenders also set a minimum income threshold to avail a loan. A loan may not be available if the borrower has a low income. If available, then it will not in their favourable terms.
• Loan amount – Gross income is also used to determine the maximum loan amount that can be granted to the borrower.
• Interest rate – A higher gross income implies a lower risk for the lender, hence the interest rate will be lower. Conversely, a borrower with low gross income will get a loan at a higher rate of interest since it will involve a higher lending risk for the lender.
• Repayment terms – As mentioned earlier, high gross income involves less risk for the lender, hence the borrower may get loan for longer tenure with lower monthly instalments. On the other hand, a borrower with low gross income might get a short term loan with high EMIs increasing the repayment burden on the borrower.
• Debt-to-Income (DTI) ratio – DTI is the percentage of our gross income used to pay monthly debt obligations. DTI ratio below 43% is considered to be good and indicates a healthy credit report and high repaying capacity of the borrower. A borrower with higher DTI ratio might get loan at less favourable loan terms.

Conclusion

Gross income is a necessary criterion for availing a personal loan. It helps determine interest rate, repayment terms and loan amount. It also helps in determining the loan eligibility. A loan can be availed at favourable terms with a high gross income. IIFL Finance provides comprehensive and customised personal loans. The personal loan calculator is perfect for determining your repayment obligations. A borrower can use personal loan eligibility check to determine his eligibility. You can get up to Rs 5 lakh instant funds with a quick disbursal process. You can apply online or offline by visiting IIFL Finance nearest branch and verifying your KYC details.

Frequently Asked Questions

1. What is gross income?

Gross income refers to an individual’s total income from all sources before any deductions like taxes.

2. Do I need collateral for a personal loan from IIFL Finance?

No, you do not need to pledge any asset as collateral to take a personal loan from IIFL Finance.

3. Do I need to state the reason for availing the personal loan to IIFL Finance?

No, you can use the personal loan amount for any expense. There are no end-use restrictions on using the personal loan amount.