Fixed Income to Obligation Ratio or FOIR is a parameter that helps lenders to assess their customer’s loan repaying capacity. In banking terms, it is often referred to as debt-to-income ratio. It indicates your disposable income that can be used to repay newer loans. In this blog, you will learn more about FOIR and its significance in securing a personal loan. Read on!
What is FOIR?
FOIR is your fixed monthly cash outgo as a percentage of your monthly income. It plays a critical role in determining your Personal Loan eligibility. FOIR is also known as the debt-to-income ratio and includes monthly payable EMIs against the monthly income.
How to Calculate FOIR in Personal Loan?
The following formula is used for FOIR calculation:
Fixed Obligation to Income Ratio= Total Fixed Monthly Obligations/ Net Monthly Salary x 100
Here’s an example to help you understand FOIR formula calculation better:
Mr. X wants to take a Personal Loan of Rs.10 Lakh for a tenure of 5 years. His net monthly income is Rs.1 Lakh, and the following are his fixed monthly payables.
- Rs.5,000 towards Pre-owned Car Loan
- Rs.21,500 for Home Loan
After using the Personal Loan EMI calculator, Mr. X finds his monthly EMI for the desired loan amount to be rs.21,742.
FOIR Calculation: (5,000 + 21,500 + 21,742)/ 1,00,000 x 100 = 48.24%
Ideally, this FOIR value should range between 40% and 50%, which means your total monthly obligations should not exceed 50% of your net monthly income. For those with higher net income, lenders also consider FOIR which goes up to even 60% or 70%.
Also Read: Can I Take Multiple Personal Loans At Same Time?
Why Is It Essential to Calculate FOIR?
Let’s understand the importance of FOIR calculation for a Personal Loan in a hypothetical situation. Suppose, two friends named Rahul and Atul apply for a Car Loan separately. While applying, the lender assessed Rahul’s FOIR to be 55% while Atul’s FOIR was 70%. In this case, the lender will prefer to provide Rahul with his desired loan amount.
Whereas, Atul may face some issues in getting a favourable loan sanctioned as his profile indicates more risk for the lender. Thus, a lower FOIR always raises the chances of a loan approval.
How Does FOIR Affect Your Personal Loan Approval?
When you maintain a low FOIR it impacts your overall financial situation. Here’s how:
- Your total liabilities are reduced.
- The disposable income increases.
- Lenders gain more confidence in your repayment capacity.
These factors combine together to promote your creditworthiness. Maintaining a low FOIR can help you manage your finances in a better way. Not only does it increase your monthly disposable income, but it also reduces total liabilities and improves your loan repayment capacity.
These factors are instrumental in getting a Personal Loan approval as they determine your creditworthiness to the lenders, thereby improving your chances of getting a speedy approval.
How to Minimise FOIR?
These are a few proven methods that you can follow to minimise your FOIR and improve the chances of a loan approval:
- Pay off the outstanding debts as soon as possible.
- For new loans apply with a co-applicant, provided the other person has a low FOIR.
- Opt for loan offers only when you are eligible based on the conditions put forward by the lender.
- Provide proof of stable income to the lender.
Besides having a low FOIR, you must also secure an excellent credit score to get a sufficient personal loan and avoid a financial crisis. To use a FOIR calculator online, you can rely on Poonawalla Fincorp.
Also Read: How to Plan a Budget Friendly Family Vacation?
To Conclude
If your FOIR is on the higher side, you must work towards reducing it before applying for a loan. Otherwise, it will be fairly challenging to get favourable credit offers. Keep track of your FOIR and devise strategies to improve it. If the FOIR is low, your credit score is high, and you meet other eligibility criteria, you can instantly get loan approval. For a hassle-free loan journey, apply for a Personal Loan from Poonawalla Fincorp and make every dream possible!
Frequently Asked Questions
1. What are the three factors that influence loan eligibility?
Lenders judge a prospective borrower’s creditworthiness by assessing their:
- Debt-to-income ratio
- Credit score
- Income-to-expense ratio
Based on the results, the borrowers are offered either a secured or unsecured loan with varying conditions.
2. What is a good FOIR to maintain?
Ideally, FOIR must lie between 40% and 50%. So, your total monthly expenses should not exceed 50% of your earnings. For people with a higher net worth, lenders consider even higher FOIRs (above 65% to 70%) as favourable for loan deals.
3. Do all banks have the same criteria for FOIR?
No, as the lenders haven’t standardised the margin for FOIR. However, most banks and NBFCs consider a percentage between 40% and 55% as the most favourable. However, this range is not fixed and is bound to differ according to the loan type and net worth of the borrower.