What is Credit Appraisal?

Credit Appraisal

In order to borrow a loan an individual or a business must satisfy certain criteria. The check is usually on someone’s financial conditions and his ability to repay the loan borrowed. This process is termed as Credit appraisal. Every bank or financial institution has their own set of standards to evaluate the eligibility of an individual or business entrepreneur for loan application. These standards may vary for different loans such as housing, vehicle, etc.

How is it done?

The loan repayment ability of a individual is decided based on the following factors:

Total Annual Income
Age
Educational Qualification
Whether holding any tenure for previously availed loans.
Employment status
Nature of business
Security of tenure
Taxation history
Assets owned for mortgages
Other liabilities if applicable

What happens after Credit Appraisal?

After the appraisal process the loan must be sanctioned to the borrower based on the norms described by the Bank or the financial institution. There are basically three types of norms called LTV, IIR and FOIR norms.

LTV - Loan to Value Ratio depends on the total value of the property that the borrower has.
IIR - Installment to Income Ratio describes the customer’s monthly Interest rate based on his income.
FOIR - Fixed Obligation to Income Ratio, this takes into account all the fixed monthly obligations of the customer including any other loans that he has availed so far.