Lenders typically rely on the debt-to-income ratio or Fixed Obligation Income Ratio (FOIR), loan-to-value ratio, and installment income ratio (IIR) when determining your eligibility for a higher loan amount, particularly with instant personal loans.
Besides, lenders also use the multiplier method to assess and sanction loan amounts based on the borrower’s creditworthiness, loan-to-value ratio, financial situation, and loan purpose. Further, the methods can vary depending on the type of loan, such as personal loan, business loan, etc., and the lender’s policies.
Adhil Shetty, CEO of BankBazaar.com, said, “While considering your loan application, the lender would first assess your credit score and history to understand your creditworthiness, payment behaviour, and outstanding liabilities. Your income would also influence the loan amount that will be sanctioned. A stable source of income that indicates regular repayment of loans would be considered favourably by the lenders in determining the amount.”
Debt-to-income (DTI) ratio: Lenders would calculate your debt-to-income (DTI) ratio by comparing your monthly debt payments to your gross monthly income. A lower DTI ratio is generally preferred, indicating that the borrower has more disposable income to cover loan payments.
While your monthly income is undeniably significant in gauging your loan eligibility, other factors also come into play. Regularly monitoring your credit score, existing financial obligations, and employment stability can improve your loan amount, ensuring a seamless and successful borrowing experience.
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The loan-to-value ratio (LTV): One of the most crucial factors determining the loan amount would be the loan-to-value ratio (LTV). LTV is an important factor in the lending decision-making process, especially in a housing loan, as it helps lenders evaluate the risk associated with the loan and set appropriate terms and conditions. LTV is the loan amount ratio to the asset or collateral value against which the loan is secured.
“Higher LTV ratios represent a higher risk for the lender as the borrower has less stake in the property. If property values decline, borrowers with a high LTV ratio may be at a greater risk of owing more to the lender than the property is worth. The LTV varies depending on the type of loan and the loan amount. For instance, the LTV on home loans can be as high as 90% for loans below Rs 30 lakh. On the other hand, the maximum LTV on loans against shares or securities may be in the range of 50-60% due to the volatility of the asset,” said Shetty.