Why can’t I get a loan despite good credit score?

—Name withheld on request

A credit score of more than 800 is very good and should get you a loan easily. However, please note that the credit score of 800 reflects your creditworthiness and not your eligibility. It shows you are a responsible borrower and have repaid on time. However, the loan eligibility of an individual is determined by his repayment capacity, which in turn is determined by the disposable income available for spending after all necessary expenses.

It is difficult for lenders to estimate the monthly expenses of each borrower individually so they go by a pre-determined percentage of one’s net income, known as the fixed obligations to income ratio (FOIR). The FOIR takes into account all instalments of loans availed by the applicant, including the EMI of the prospective loan under consideration.

Most banks rely on the FOIR to gauge the repayment capacity of the loan applicant. As a rule of thumb, lenders restrict FOIR to a maximum of 40-50% of the monthly income. So, if your income is ₹1,10,000 per month and you are paying a home loan EMI of ₹40,000 and a personal loan EMI of ₹7,000, your FOIR is already close to 43% (47,000/110000 x 100).

This leaves you with very little room for another loan. At the most, you can take a loan with an EMI not exceeding ₹8,000 per month.

Some non-bank financial companies are willing to lend to individuals even though the FOIR limit has been breached. But such loans come at a higher rate of interest. Also, it is not advisable to take a loan which stretches your finances beyond the stated limits. When your personal loan ends in two years, your FOIR will go down, enhancing your eligibility to access fresh credit.

Raj Khosla is managing director at MyMoneyMantra.com.

Updated: 12 Jun 2023, 11:06 PM IST