Before approving a loan, lenders ensure that the borrower fulfills the eligibility criteria and assess their creditworthiness. Any lender’s main concern is whether the borrower will be able to repay the loan amount.
To reduce risk, lenders check income, credit history, financial liabilities, and other documents. Based on a borrower’s income, lenders calculate 3 different ratios to determine eligibility.
These ratios are FOIR (Fixed Obligation to Income Ratio), LTV (Loan-to-value ratio), and IIR (Installment Income Ratio). Here, we will understand what FOIR is, FOIR calculation, and how FOIR affects personal loan approval.
What is FOIR?
FOIR (Fixed Obligation to Income Ratio) is a tool used by lenders to assess an individual’s ability to repay a loan by comparing their fixed monthly obligations, like loan repayments and rent, to their monthly income. FOIR is expressed in the form of a percentage and helps lenders assess if the borrower can manage the additional debt burden of a new loan.
A lower FOIR indicates a lower current debt-to-income ratio, which typically increases the probability of loan approval.
Borrowers are required to stick to the predetermined FOIR percentages set by all lenders. While it varies from lender to lender, the FOIR limit is often between 40% and 50%.
How is FOIR calculated?
To calculate FOIR, the applicant’s total monthly obligations, including all existing EMI payments, credit card bill amounts, rent, and living expenditures, are divided by their total monthly income and multiplied by 100.
FOIR = (Sum of All Existing Obligations/Net Monthly Salary) x 100
Lenders typically set a maximum FOIR limit based on the type of loan. A lower FOIR indicates a stronger financial position, which means you will have a higher chance of getting a loan.
FOIR Calculation Example:
If Mr. Y has a total monthly income of ₹50,000. His monthly obligations include a home loan EMI of ₹5,000 and credit card charges of ₹10,000. Now, Mr. Y has applied for a personal loan; let’s see the calculation for FOIR.
Total Financial Obligation = 10,000 + 5,000 = 15,000
FOIR = (15000/50000) x 100 = 30%
In this case, Mr. Y has a high chance of personal loan approval as his FOIR is 30%.
Factors That Affect FOIR for Personal Loan
If you want to get a personal loan online, the factors that affect FOIR for personal loan approval are listed below.
- The major factor that affects your chances of approval for a personal loan is the number of dependents you have. The more earning members of the family you have, the better your chances of approval.
- Salary and other sources of income are the major factors. All the income can be combined to decrease the FOIR, which will help with loan approval.
- If you have any past dues on the loan, your FOIR will increase, making it difficult for you to get the loan.
- If you have any liabilities on top of your regular monthly expenses, that will increase your FOIR.
- Your current employment status and how long you have been in the same organization build trust and affect the approval of your personal loan.
Tips to reduce FOIR
Higher FOIR means larger obligations, which reduces your chances of getting a personal loan. Here are a few tips to reduce FOIR to make getting a personal loan easier.
Evaluate Existing Obligation
Before submitting a personal loan application, evaluate your current financial obligations. This includes credit card payments, existing loan EMIs, and other fixed monthly obligations like rent. Understanding your present fixed commitments is key to managing your FOIR.
Extended Loan Tenure
The longer the loan tenure, the lower the EMI. Lower EMI means lower FOIR, which can help you get a personal loan easily, so you are advised to get an extended loan tenure.
Avoid Multiple Loans
Too many loans mean a higher amount paid in EMIs, which will not only increase the FOIR but also cause lenders to lose trust. It is advisable not to take multiple loans at the same time.
Improve Your Credit Score
A higher credit score indicates a better credit history and a lower default risk. If your credit score rises, you might be able to negotiate better loan terms, like a reduced FOIR.
Conclusion
FOIR shows how much of their disposable income can be used to pay off new debt. Monthly expenses shouldn’t exceed 50% of the total income, with an average FOIR of between 40% and 55%.
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FAQ
Does the income of a co-borrower impact the FOIR for loan approval?
Ans. Yes, the co-borrower’s income impacts the FOIR calculations. Having an income significantly higher than the obligations can increase the probability of loan approval.
Are FOIR and credit scores the same?
Ans. No, a credit score is not the same as FOIR. While your credit score indicates your trustworthiness based on your credit history, your FOIR calculates the percentage of your current financial obligations compared to your income.
I want to get a loan, but is there a way I can lower my FOIR?
Ans. Before applying for a personal loan, increasing your income or lowering your current fixed obligations can lower your FOIR.
Does FOIR only apply to employed individuals?
Ans. No, FOIR is applicable to both self-employed and salaried employees. To evaluate a borrower’s eligibility for a loan, lenders consider their FOIR.
In the calculation of FOIR, what obligations are considered to be fixed?
Ans. Existing loan EMIs, rent, living expenses, insurance premiums, and any other fixed monthly commitments are examples of fixed obligations.