Determining the eligibility of the applicant is the first step that a lender takes while considering a Personal Loan application. While availing of a Personal Loan, all financial institutions go through the applicants’ credit score, monthly income, employment history, and current loans to evaluate the repayment capacity of the borrower.
FOIR stands for Fixed Obligations to Income Ratio, which is included in most lenders’ evaluation criteria. Let us understand what FOIR is and how it is calculated while availing of a Personal Loan.
In simple words, FOIR is your fixed monthly cash outgo as a percentage of your monthly income. The result is your monthly disposable income, which is used by lenders to determine your repayment capabilities.
As Personal Loans are unsecured loans, lenders are cautious when evaluating your credit profile and history. The risk of default is higher when an applicant applies for a Personal Loan. Hence, FOIR 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.
The following FOIR formula is used to calculate FOIR:
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:
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, your FOIR 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%.
Having and 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.
There are some ways through which you can reduce your FOIR to increase your chances of securing a Personal Loan.
Individuals who can manage their finances well are considered trustworthy by lenders. If you have taken multiple loans (home loan, car loan, business loan), the lender might think that you are leveraged and may not be good at managing your finances.
If there are many loans running it may be advisable to consolidate the loans into one single loan and have an installment which is lower than the combined installments of all loans put together that are being consolidated.
You can consider applying for some loans like home loan with an earning co-applicant. The co-applicant could be family member, parents, or spouse. This will reduce your FOIR as only part of the EMI of home loan will be considered as your obligation.
The credit utilization ratio is the amount between the credit you utilize and the credit amount that is available to you. Having a credit card utilization ratio under 30% will increase your chances of getting approval for a Personal Loan.
Since a Personal Loan is an unsecured loan, lenders take your credit history and repayment capacity as the primary parameter to approve your loan application. At Poonawalla Fincorp, we offer Personal Loans at attractive interest rates. Our minimal documentation and quick online Personal Loan application process will ensure that you get your funds seamlessly, without any hassle. You can also use our Personal Loan EMI calculator to determine your monthly EMIs. The tool is user-friendly and can be found on our website. Just enter the loan amount, interest rate, and desired tenure to derive your monthly EMIs.
Through this, managing your monthly expenses and payments will become easier. If you are seeking to apply for a Personal Loan, consider re-evaluating your FOIR to plan your monthly payments without stressing your budget.
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