Meaning Of FOIR & Its Effect On Personal Loan Approval

When approving a loan, especially a personal loan, lenders consider several factors to determine the applicant's eligibility. An example of such a parameter is the Fixed Obligation to Income Ratio (FOIR). This article explores the FOIR ratio and how it affects a personal loan application.

What Is FOIR?

FOIR is a measure of a borrower's debt-to-income ratio. Banks or NBFCs use it to determine a borrower's disposable income amount and the debt they owe.

An individual's disposable income determines their chances of getting the best interest rate on a personal loan. Lenders are more comfortable lending to borrowers with a higher disposable income because they know they can pay back their EMIs stress-free.

The Impact Of FOIR On Personal Loan Approval

A borrower's FOIR should be between 40% and 55% to be considered credible.

Lower FOIRs mean lower financial obligations and higher monthly income for borrowers. As a result, they have more disposable income than required because of their financial obligations. Therefore, they represent a lower risk to lenders since they can repay their interest quickly than those with higher FOIRs.

Higher FOIR indicates that the person has a higher level of debt and, as a result, a lower level of disposable income. Thus, they may face challenges in paying their EMIs, resulting in delays or defaults on payments. Lenders face a higher risk from such borrowers.

As a result, those with lower FOIRs have a higher chance of receiving loan approval.

How Is FOIR Calculated?

Calculating FOIR is simple. The formula adds monthly debts, including existing EMIs, rent, credit card payments, and living expenses. Divide the sum by the applicant's gross monthly income and multiply it by 100.

FOIR = (Total debt/Total monthly income ) x 100

Note: The FOIR calculation does not include tax deductions and contributions to fixed and recurring deposits.

What Are Some Ways To Reduce FOIR?

• Apply For A Joint Loan:

Through a joint loan, both applicants share the EMI amount. You can reduce the FOIR through this method and increase your chances of loan approval.

• Maintain A Healthy Credit Score:

Maintain a healthy and clear credit history. Keep your credit utilisation ratio low by making timely payments.

• Avoid Having Multiple Loans:

Having multiple loans leaves the impression that you are always in debt and cannot manage your finances effectively. Therefore, the lender is uncertain about your ability to repay the loan.

When applying for a personal loan, it is essential to understand what FOIR means and how it functions. A healthy FOIR will assist you in expediting the loan approval process. Additionally, it improves your financial standing.

FAQs

Q1. What is a good FOIR ratio?
Ans. A FOIR of 40% to 50% is ideal. In other words, your monthly expenses must not exceed 50% of your income.

Q2. What is FOIR in a personal loan?
Ans. FOIR or 'Fixed obligations to income ratio' means an applicant’s debt-to-income ratio. In most cases, lenders use this parameter to determine whether an applicant is eligible for a loan.