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This blog explains the concept of FOIR, how it is calculated and its impacts if you are applying for a personal loan.
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Applying for a personal loan is more complicated than it seems, so a thorough understanding of a loan and its eligibility is important. An important factor that is calculated by banks or lending bodies is FOIR which decides the chances of approval of your personal loan application. In this article, a detailed explanation of FOIR shall be presentedwith its impacts on your loan application.
FOIR stands for Fixed Obligations to Income Ratio. As the name suggests, this calculation is done to assess the fixed monthly expenses of a person with respect to their monthly income. Based on this math, the loan repayment capability of an individual is ascertained. The fixed monthly expenditure entails the ongoing Equated Monthly Instalment (EMI) for any loan, monthly rent, and other fixed expenditure which is spent every month out of their salary.
The banks or financial bodies calculate FOIR to find out the portion of your income that is spent on all the financial commitments and the remaining balance available in your account, which shall be taken into account for any new loan application. If the FOIR ratio is low, it signifies that you have a substantial amount in your balance even after spending on your fixed expenditure. This means there is a good probability of loan repayment based on your finances. On the contrary, if the calculated FOIR ratio is high, it means a significant amount of your monthly income is already consumed by your fixed financial debts. This reduces the chances of any new loan repayment commitment, leading to the rejection of your loan application.
Calculating FOIR is easy. Here are the components to consider while assessing your ratio.
Here is how FOIR is calculated-
FOIR = [Total Fixed Monthly Obligations]x 100
[Net Monthly Income]
For example-
A household has a monthly salary of ₹50,000 and its fixed expenses as elaborated below-
- Net Monthly Income (NMI): ₹50,000
- Ongoing Home Loan EMI: ₹10,000
- Ongoing Car Loan EMI: ₹5,000
- Monthly Rent: ₹8,000
{Total Fixed Monthly Obligations} = 10,000 + 5,000 + 8,000 = ₹23,000
FOIR = [23,000] x100 = 46%
[50,000]
Therefore, in this case, the calculated FOIR is 46%. This means that 46% of the applicant’s income is already being spent on fixed obligations.
Now that the FOIR has been explained in detail, it is amply clear that an individual with a low FOIR will have a high chance of loan approval and an individual with a high FOIR will have a lower chances of loan approval. So, your FOIR is inversely proportional to your loan eligibility. Here is how various FOIRs impact your loan eligibility.
- Below 40%: This is the best score for any creditor to sanction your loan application. This ratio is considered as low risk as the applicant has a good amount of income at their disposal even after spending on their fixed obligations.
- Between 40% to 50%: This is a good enough ratio for your loan application to be accepted. Applicants within this range may be granted a loan, though not as swiftly as people with lower FOIR.
- Above 50%:This ratio is an indication that more than half of the applicant’s monthly income is spent on fixed expenditure. Your application has a high possibility of getting rejected or a higher interest rate can be levied on your loan amount.
Let’s take a look at some tips to improve your FOIR so that you can be eligible for a personal loan.
1. Repay Existing Debts: Try to repay all the loans at the earliest and if possiblefocus on closing the loans that have a higher interest. Your fixed expenses shall be lessened, improving your FOIR and you can consider applying for a fresh loan.
2. Increase Your Income: Your FOIR will automatically increase if your income gets better. If you are qualified, try to find a better-paying job so that your financial burdens are decreased. Otherwise, you can consider an added income in the form of any passive source like rental income. This can increase your FOIR significantly.
3. Consolidate Debts: If you are paying several loans together, consolidate all of them into a single loan with one EMI. You can consult your lending body for a consolidated loan.
4. Avoid New Loans: Avoid applying for any new loans if you have a high FOIR. Focus on bringing your monthly expenditure down, improving your FOIR and then apply for a new loan.
Along with FOIR, there are other financial determiners for lending institutions which evaluate the eligibility criteria of loan applications. Let’stake a look at a few of these.
- Credit Score: This is the most recognised form of eligibility criteria which is calculated based on your financial behaviour. If there are no EMI defaults and a clean repayment history, your credit score gets automatically high. A high credit score increases your chances of loan approval just like a low FOIR.
- Loan-to-Value Ratio (LTV): This metric is used for secured loans. This percentage is assessed by dividing the loan amount from the asset against which the loan is being secured. Similar to FOIR, a lower LTV ensures less risk to the lender while a high LTV can mean high risk for the lender, as this is dependent on market rates.
- Debt-to-Income Ratio (DTI): This metric is similar toFOIR and it takes into account all the debts on your gross income. FOIR is limited to fixed expenses but DTI considers all types of debts.
It is therefore important to have a complete understanding of FOIR so that any potential impact on the applicant can be considered well ahead of time. A simple calculation can help you assess your financial standing and help you understand your worth as a borrower, thereby saving your effort of applying and bearing the consequence of rejection. It is therefore recommended not to go overboard with your monthly expenses, to use your finances judiciously and to save a good amount of your income after paying all of your monthly financial obligations. With a healthy FOIR, you can manage your expenses comfortably and still apply for a loan.
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