How do lenders decide loan amounts to be sanctioned? – Times of India

Lenders use a variety of methods to determine the loan amount to be sanctioned to an individual or business. The specific methods can vary depending on the type of loan, the lender’s policies, and the borrower’s financial situation. Here are some common methods used by lenders:

Credit Score and Credit History

Lenders often rely on credit scores and credit reports to assess a borrower’s creditworthiness.A higher credit score generally indicates a lower credit risk, and borrowers with good credit may qualify for higher loan amounts.ALSO READ: What is a good credit score to get a loan in India?

Multiplier Method

Lenders use the Multiplier Method to determine personal loan amounts. This involves multiplying the applicant’s net monthly income by a predetermined factor, usually between 10 and 24 times.

Debt-to-Income (DTI) Ratio

The DTI ratio is calculated by comparing monthly debt payments to gross monthly income. A lower DTI ratio is preferred, indicating more disposable income for covering loan payments. While monthly income is crucial, factors like credit score, existing obligations, and employment stability also impact loan eligibility.ALSO READ: Why ignoring credit utilization ratio is a mistake you can’t afford

EMI/NMI Ratio

This ratio considers the proportion of net monthly income spent on existing EMIs and the proposed loan’s EMI. Lenders often favor applicants with an EMI/NMI ratio of up to 50-55%. If it exceeds this limit, extending the loan tenure or opting for lower interest rates can enhance eligibility for a higher loan amount.

Loan-to-Value Ratio (LTV)

The LTV ratio is crucial, especially in housing loans, as it helps evaluate risk. It represents the ratio of the loan amount to the asset or collateral value securing the loan. Lenders use this information to set appropriate terms and conditions for the loan.ALSO READ: Home loan vs mortgage loan: Know the difference

Conclusion

It’s important to note that different lenders may prioritize these factors differently, and the criteria can vary based on the type of loan and the lender’s policies. Additionally, regulatory requirements and economic conditions can influence lending practices. Borrowers are encouraged to communicate openly with lenders and understand the specific criteria used in the loan approval process.