What is FOIR? How does it impact personal loan approval?

2 min read

Banks and financial institutions judge a loan applicant’s creditworthiness before granting loan approval, especially for unsecured loans such as a personal loan. FOIR is a metric that helps banks and financial institutions do this. Also known as fixed obligation to income ratio, FOIR helps a lender determine whether you have the necessary repayment capacity.

In a nutshell, FOIR measures your fixed monthly outgo as a percentage of your net monthly income. The result indicates your disposable income, and whether or not it will be sufficient for loan repayment. As the risk borne by a lender is higher in case of unsecured loans, your FOIR holds significant weight when a lender is assessing your personal loan eligibility.

Ideally, your FOIR must be between 40% and 50%. This means that your total monthly expenses should not be more than 50% of your income. For those with a high net worth, certain lenders consider an FOIR that goes up to 65% or even 70%.

How is FOIR calculated?

You can use the following formula to calculate FOIR.
Fixed obligation to income ratio = Total fixed monthly obligations/ Net monthly salary x 100

Here, fixed monthly obligations include:

  • Credit card payments
  • Existing EMIs
  • Rent payments
  • Monthly living expenses
  • EMI of the loan that you’re applying for
  • Other debt obligations, if any

However, contributions to fixed or recurring deposits and taxes payable are not considered to be fixed monthly obligations.

If your FOIR is high, take measures to reduce it before applying for a loan. Typically, with a high credit score and low FOIR, you can secure ample funds through a personal loan conveniently.

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