Personal loans are unsecured loans. To ascertain the borrower’s repayment capability, lenders have set certain parameters. One of the most common parameters is FOIR. The full form of FOIR is a Fixed Obligation to Income Ratio. It plays a key role in personal loan online approval.
FOIR checks the payment obligations you have in relation to your income. This helps in determining your disposable income and whether you will be able to repay the loan without defaulting. FOIR is calculated considering a borrower’s Equity Monthly Instalments (EMIs). It tells the proportion of your EMIs to your income. Thus, it becomes an important factor while processing a loan application. Other factors that a lender considers while approving a loan are credit history, income records, instalment of current loans, etc.
How is FOIR Calculated?
FOIR has a simple calculation formula. It is calculated by dividing a person’s total debts or existing obligations by their total monthly income multiplied by 100. Some lenders also consider the applicant’s rent and insurance premiums along with their EMIs as a fixed obligation. The EMIs could be for a home loan or a car loan. Other financial obligations can include:
- Credit card payments
- Monthly living expenses
- EMI of the loan the borrower is applying for
However, the debt amount does not include tax deductions and contributions to Fixed Deposits and Recurring Deposits.
FOIR = (sum of total debts/sum of total monthly income)*100
Now, let’s look at it with an example. Suppose a person’s total monthly income is Rs. 50,000. And their total existing obligations in a month are Rs 20,000. The FOIR will be 20000/50000*100=40%
Effects of FOIR on Personal Loan Eligibility
FOIR is considered in all types of loans, such as personal loans, home loans, etc. Since there is no asset security in personal loans, FOIR plays an important role. It is one of the most common parameters lenders consider while providing a personal loan. A lower FOIR signifies the borrower has fewer monthly fixed obligations or debts. This shows their repayment capability is strong. Hence, the chances of getting a personal loan increase.
The average FOIR may vary from lender to lender and from case to case. Ideally, a FOIR must be between 40% and 55%. This makes securing a loan easy. However, people with a FOIR of at least 60% can get a loan too. But, this is usually the case with people with high net worth.
Low FOIR Effects on Your Finances
A low FOIR means that you have fewer obligations or debts. This shows you have a good amount of disposable income, making you capable of repaying a loan on time. These factors can help in securing a loan as they reflect favorable creditworthiness.
Maintaining a low FOIR impacts your finances by:
- Reducing your total liabilities
- Increases your disposable income
- Improves the repayment capacity
How to Improve Your FOIR
FOIR on the higher side can cause trouble while securing a loan. It is one of the parameters that lenders consider. However, you can take some measures to improve your FOIR. These include:
- Pay off your outstanding debts. A lesser amount of debt will result in a higher FOIR. This will also result in a better credit score.
- Disclose other regular sources of income, if any. This will further help in improving FOIR.
- Do not take multiple loans at the same time. This leaves an impression of higher debt, which can result in lower chances of securing a loan.
- Maintaining a low credit utilization ratio is another way to improve your FOIR. The credit utilisation ratio compares the total amount of credit available to the amount of credit used. It calculates the maximum amount of credit that can be used. It is best to keep your credit utilization ratio under 30% before you apply for a personal loan. Loans are frequently denied when the credit utilisation ratio is high.
- Increasing your loan tenure can reduce your EMIs. This will further help in improving your FOIR.
- Maintain your credit history.
- Adding a co-applicant can also help in reducing the FOIR as the EMI burden is divided. Usually, adding an earning family member is advised.
- Do not switch jobs frequently within a short period of time. This leaves a negative impression on the lender.
Ratio Impacting Loan Eligibility
Generally, three ratios influence loan eligibility. These are:
- Fixed Obligation to Income Ratio (FOIR)
- Instalment to Income Ratio (IIR)
- Loan-to-Value Ratio (LTV)
A lender usually expects you to repay the loan on time. To be sure of this, they check your monthly income and see what portion of it is spent on repaying other debts. FOIR helps them ascertain this. Typically, a borrower should not be spending more than 50% of their income on repaying debts. These debts can include EMIs from home loans, car loans, credit card bills, and so on.
A lower FOIR indicates that the borrower has healthy finances. Thus, securing a personal loan becomes easy. FOIR is one of the parameters that a lender checks. So, make sure you meet other criteria as well. We hope that this article has helped you understand the FOIR meaning. To learn more about personal loans, you can check out other blogs at Piramal Finance. Also, explore the various products and services they offer.
Bank Criteria for FOIR
FOIR margins can differ from bank to bank. There is no set standard margin. However, a FOIR between 40% to 55% has the maximum chance of securing a loan. Lenders do consider people with higher FOIR for loans. These are generally people with a high net worth.