How to get loan from bank: IIR, FOIR & LCR definition
Banks make various calculations to decide the maximum amount of loan to be granted. It includes the terms Installment to Income Ratio (IIR), Fixed Obligation to Income Ratio (FOIR) and Loan to Cost ratio (LCR). Let's read about them in details so that the chance of rejection of loan application from bank can be reduced.
How to get a loan from the bank
Banks provide a great help to a person when he needs money. They offer loan and lens a helping hand by providing him financial assistance. But the process to get loan from bank is not so simple. The lender does not lend money on just ‘Come and serve' basis. Rather, they make proper investigation and make calculations to know the eligibility of a person to repay loan. Various calculations are made to decide the maximum amount of loan to be granted.
In the absence of such calculations, banks may have to suffer bad debts. Banks follow various parameters which act as a guide for them to decide the maximum loan amount which can be granted to the borrower. These ratios are:
1. Installment to Income Ratio (IIR)
2. Fixed Obligation to Income Ratio (FOIR)
3. Loan to Cost ratio (LCR)
The results derived from each ratio may or may not be similar. If the amount calculated by all of the above mentioned three ratios of different (which happens in most of the cases), then banks take the lowest amount calculated among all ratios as loan amount which can be lend to the applicant. Such lowest amount will be the maximum limit up to which the bank can lend him loan. If it crosses such amount, then it may have to suffer bad debts as else it will cross the credit worthiness of the borrower. Installment to Income Ratio definition
Installment to Income Ratio helps to know the eligibility of a person to repay loan. It is usually expressed in percentage. Banks assume that usually a person can pay maximum installment per month up to 33.33% to 40% of his total salary. Thus the loan is granted to him to such extent so that loan doesn't exceed 33.33% to 40% of his salary.
For example:
If a person's income is Rs. 50,000 per month and IIR considered is 33.33%, then the person is eligible to loan amount where maximum installment is Rs. 16,665. Thus we can say that purpose of Installment to Income Ratio (IIR) is to specify the portion of borrower's maximum monthly installment on loan taken.Fixed Obligation to Income Ratio (FOIR) definition
Banks also calculate and consider FOIR of a customer before lending loan. Under this ratio, banks consider the other fixed obligation of the customer which are currently due to him; and deduct the maximum monthly repayment capacity of the customer accordingly. However, statutory deduction like Provident Fund, Professional Tax, investment deductions (like insurance premium, Recurring Deposit, installment, etc.) are not included under fixed obligations.
For example:
A person has income of Rs. 50,000 per month. Thus his FOIR is Rs. 25,000. Numerically it is equal to 50% of income. Bank has standard of 40% FIOR, then the maximum monthly installment comes to Rs. 20,000. But he is already paying Rs. 10,000 per month as repayment of car loan and Rs. 4,000 per month as repayment of personal loan. Thus his loan amount would be reduced accordingly to maximum EMI of Rs. 6,000 (20,000 -10,000 -4,000)Loan to Cost ratio definition
The value generated after calculating the first two steps can be higher but the amount of loan to be granted cannot exceed the actual amount of property for which the borrower is seeking loan. Generally, LCR is 70% to 90% of the registered value of the property. This ratio sets the uppermost limit of the maximum amount of loan to be granted, irrespective of the fact that IIR and FOIR are higher than LCR.
Thus, total amount of loan cannot exceed the cost or value of the property (as calculated under LCR); even although he is eligible to higher loan installment per month