What is FOIR? How does it impact personal loan approval?
Banks and financial institutions judge a loan applicant’s creditworthiness before approving their application, especially for unsecured loans such as a personal loan. FOIR is a metric that helps banks and financial institutions do this. FOIR’s full form is 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 the case of unsecured loans, your FOIR holds significant weight when a lender is assessing your personal loan eligibility. The FOIR calculation also includes EMIs payable towards a prospective loan an applicant has requested with the lender. It is also known as the debt-to-income ratio.
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. Specific lenders consider FOIR that goes up to 65% or even 70% for those with a high net worth.
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
Understand it with the help of the following example:
An individual has applied for a personal loan of Rs. 5 lakh for five years. If his net monthly income is Rs. 80,000 and his fixed expenditures include the following:
- Rs. 5,000 as EMI towards car loan
- Rs. 7,000 as EMI towards home loan
- Monthly rent equals Rs. 8,000
- Other fixed payments comprise Rs. 8,000
Also, the EMI calculated for his prospective loan is Rs. 11,377.
His FOIR = (5,000 + 7,000 + 8,000 + 8,000 + 11,377)/80,000 x100 = 49.2%.
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 fixed monthly obligations.
How does FOIR affect personal loan approval?
Maintaining low FOIR impacts your finances in the following ways:
- Reduces the total liabilities
- Disposable income increases
- Improves repayment capacity
Such factors favour an applicant’s creditworthiness, thus improving his/ her chances of getting loan approval.
Individuals with a higher FOIR can improve their approval chances by employing the following techniques:
- Pay off an outstanding loan liability
- Apply with a co-signer who holds a low FOIR
- Fulfil all other eligibility criteria laid down by the selected lender
- Disclose any other regular source of income to the lender
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 conveniently secure ample funds through a personal loan.