What does IIR mean in ACCOUNTING

What is IIR

IIR or “Installment to Income Ratio” is an important tool used by lenders and banks to assess the risk associated with providing loan or credit facility to applicants. IIR measures the amount of money borrowed against a person’s total net income each month and is expressed as a percentage or decimal number. Lenders use this figure to determine how much money they can lend out safely while also protecting their interests from defaulting customers. A good IIR ratio assigns low risk levels while higher ratios may indicate greater risk levels. The primary purpose of calculating IIR ratios on potential borrowers is to avoid situations where borrowers are unable to pay back their loans due to limited income sources.

How it Works:IIRs take into consideration both the repayment capacity and total debt obligations of prospective borrowers when assessing their suitability for loans and other financial instruments, such as credit cards or home mortgages. To calculate an individual’s Installment-To-Income ratio (IIR), lenders will firstly look at their monthly net income after deducting taxes, business expenses, etc., then divide it by all outstanding installments (excluding mortgage payments). This will result in either a decimal number or percentage which indicates how much proportion every repayment takes up against total net income each month i.e., how much of a person's salary they could potentially lose if they fail paying off their dues on time due to some unforeseen circumstances like job loss or medical disability, etc.. Generally speaking, lenders prefer lower numbers as it reduces chances that people won’t be able to meet their repayment requirements due to lack of money each month despite being able enough on paper during application process.

IIRs Vs Credit Score:Apart from taking into account traditional methods such as assessing one's financial statements and credit score; modern approaches also involve analyzing customer behavior through charge card activities like running balances, average spending per category etc.. An individual's charge card activity provides additional insight apart from credit score which focuses solely on past payment history and current credit utilization limits rather than showing punctuality/consistency in meeting payment obligations among other factors. In contrast, Higher Installment-To-Income ration implies lesser flexibility during difficult times which might lead banks/lenders not approving higher borrowing requests if required later down the road when compared with individuals having lower ratios who usually qualify more easily than those with higher ones even though both may have similar credit scores at same point in time.