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FOIR Calculation: Impact of FOIR on personal loan eligibility and tips to improve it
22 March, 2025 | 11:01 IST
When you apply for a loan, lenders check your financial health to see if you can repay it. One of the key metrics used in this assessment is FOIR (Fixed Obligation to Income Ratio). It plays an important role in determining how much loan an individual is eligible for and whether they are capable of repaying it on time.
FOIR stands for Fixed Obligation to Income Ratio and is a common factor used by banks and financial institutions to assess a borrower’s repayment ability. It represents the proportion of a borrower’s income that is already committed to fixed obligations, such as existing loan EMIs, rent and other regular monthly payments.
Lenders use FOIR to ensure that a borrower is not overburdened with debt and has sufficient disposable income to manage a new loan.
To put it simply, FOIR helps to determine:
Whether an individual has enough income left after meeting fixed obligations.
The risk involved in lending money to the borrower.
The maximum loan amount that can be sanctioned.
A lower FOIR means you have enough income left for a new loan, while a high FOIR may lead to loan rejection.
In this case, the FOIR is 40%, meaning that 40% of the individual’s income is already allocated to fixed obligations.
If you are looking for a personal loan, apart from your existing debts, Moneycontrol could be a suitable option. You can apply for personal loans up to Rs 50 lakhs from eight lenders through the Moneycontrol app and website. The interest rates start at 10.5% per annum. You can apply for the loans in a completely digital process, ensuring quick disbursement.
Risk check for lenders: Banks check FOIR to see if you can handle more debt. A high FOIR means you are already paying too many EMIs, increasing the risk of default. A low FOIR makes you a safer borrower.
Smart borrowing: Knowing your FOIR helps you avoid taking on too much debt. This keeps your finances stable and stress-free.
Loan approval: A lower FOIR increases your chances of getting a loan. A high FOIR might lead to rejection or a smaller loan amount.
Better loan offers: If you have a low FOIR, banks may offer you better interest rates and repayment terms.
Income level: Individuals with higher incomes may get loans even with a slightly high FOIR. Low-income applicants need a lower FOIR to qualify.
Existing loans: If you have multiple loans, your FOIR will be high, reducing your chances of getting a new loan. Paying off some loans can improve your FOIR.
Employment type: Salaried employees with stable jobs have a higher chance of loan approval. Self-employed individuals may face stricter FOIR limits.
Loan tenure: Choosing a longer repayment period can lower your monthly EMI, reducing FOIR.
Credit score: A high credit score (750+) can sometimes compensate for a slightly high FOIR. A low credit score along with a high FOIR may lead to loan rejection.
How to improve your FOIR?
Pay off existing debts: Close small loans and reduce credit card balances. Paying off even one EMI can significantly improve your FOIR.
Increase your income: A salary hike, side business, or freelance work can improve your FOIR. Higher income lowers the FOIR percentage.
Choose a longer loan tenure: If you take a longer tenure loan, your EMI reduces, which lowers FOIR. Example: A 5-year loan has a higher EMI than a 7-year loan.
Avoid unnecessary credit card debt: Credit card EMIs increase FOIR. Try to pay bills in full instead of converting them into EMIs.
Apply for a joint loan: If you apply with a co-borrower (spouse or parent), your combined income increases, improving your FOIR.
FOIR helps lenders decide if you can handle a new loan. A low FOIR improves your chances of approval, while a high FOIR may lead to rejection or higher interest rates. If you are looking for a loan, Moneycontrol’s online platform offers personal loans up to Rs 50 lakhs from eight lenders, with interest rates starting at 10.5% per annum. The process is 100% digital and you can receive the amount in your bank account within a few minutes to a few hours.
Summary
FOIR helps lenders assess your repayment capacity by measuring how much of your income goes toward fixed obligations. A lower FOIR increases your loan approval chances, while a higher FOIR may lead to rejection or higher interest rates.
Disclaimer
This piece/article was written by an external partner and does not reflect the work of Moneycontrol's editorial team. It may include references to products and services offered by Moneycontrol.
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