Personal Loan

FOIR: Its Meaning and Effect on Personal Loan Approval

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What is FOIR? How Does It Affect Approval for Personal Loan?

Financial institutions lay down certain parameters that help them assess the creditworthiness of an applicant. These parameters also help in determining the borrower’s eligibility for loan approvals.

FOIR is one such restrictive specification based on which loan applicants are evaluated. Assessment of an applicant’s FOIR is typically essential for personal loan approvals as these are unsecured advances and carry a higher degree of risk for the lenders. Given below is an elaboration on FOIR’s meaning, its calculation and how it affects personal loan approval.

What is the Meaning of FOIR?

FOIR’s full form is Fixed Obligation to Income Ratio. It is the computation of fixed monthly outgo of an individual as a percentage of his/her net income per month. It is a true reflection of one’s disposable income and indicates one’s repayment capacity.

The FOIR calculation also includes EMIs payable towards a prospective loan an applicant has requested for with the lender. It is also known as the debt-to-income ratio.

The ideal FOIR in banking terminology that lenders prefer when assessing personal loan applications is between 40% and 50%. It means that all the fixed monthly obligations that an individual owes should not exceed 50% of the net income for the month. For individuals with high net worth, the FOIR can go up to 65 to 70% based on lender policies..
With this understanding of FOIR, take a look at its calculation and effect on personal loan approval.

How is FOIR Calculated?

To calculate FOIR, list all the fixed monthly obligations that can include:

  • EMIs towards existing loan repayments
  • Credit card bills
  • Other debt obligations, if any
  • Rent payments
  • Other recurring living expenses

Statutory deductions such as taxes and contributions to FD or RD, however, remain out of the purview of fixed monthly obligation. Utilise the following FOIR calculation formula to compute the ratio:

Fixed Obligation to Income Ratio = Sum of all fixed monthly obligations / Net salary per month x 100

Understand it with the help of the following example:

An individual has applied for a personal loan of Rs.5 lakh for a tenor of 5 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
  • EMI towards home loan is Rs.7,000
  • 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%.

The individual’s FOIR reflects that he can make EMI payments for the prospective loan without straining his finances.

How Does FOIR Affect Personal Loan Approval?

Personal loans subject lenders to a higher degree of risk due to the absence of collateral. An applicant’s FOIR provides a critical reflection of his/her ability to make timely EMI payments. Lenders, thus, specify FOIR as a crucial measure of personal loan eligibility for applicants.

You should keep all fixed obligations, including EMIs on the new loan applied, restricted to less than 50% of the net monthly income or the FOIR for a personal loan as specified by your lender.

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 a loan approval.

Individuals with a higher FOIR can employ the following techniques to improve their approval chances.

  1. Pay off an outstanding loan liability.
  2. Apply with a co-signer who holds a low FOIR.
  3. Fulfil all other eligibility criteria laid down by the selected lender.
  4. Disclose any other regular source of income to the lender.

A combination of low FOIR and high credit score allows an individual to avail sufficient funds as personal loan conveniently.