What is FOIR, and how does it affect your personal loan approval

Master FOIR for loan success

FOIR is Fixed Obligation to Income Ratio. It is the portion of income spent on settling outstanding dues like EMIs against loan, credit card, and other repayments. FOIR is worked out by banks to determine if you will be able to manage more debt with comfort before approving a new personal loan.

How to calculate FOIR

It is a very easy calculation. Add up all your fixed monthly costs, including EMIs, rent (if covered by the lender), and usual money flows. Divide it by your net monthly income and then multiply by 100 to get a percentage. Suppose your monthly costs are Rs.20,000 and your net salary is Rs.60,000, then your FOIR will be around 33 percent. Most lenders prefer a FOIR below 50 percent, meaning your existing obligations shouldn’t exceed half of your monthly income.

Why FOIR matters to lenders

Lenders want you to keep your finances from straining too much. Lower FOIR indicates that you have enough disposable income to service a new loan, thus default risk is minimal. But high FOIR indicates that you already have an enormous debt burden on your shoulders, and that may encourage the lender to reject your request for a personal loan or cap the size of loan extended.

Your FOIR directly affects the amount you can borrow. Even if you have a good credit rating, a high FOIR can limit the amount you can borrow. The approved loan amount may be reduced by loaners or they may increase the interest to offset the higher risk. Requesting the knowledge of your FOIR in advance is useful so that it will be convenient for you to plan and choose a loan amount that will be proportional to the repayment capacity.

Ways to decrease your FOIR

Decreasing your FOIR will surely boost the chance of getting sanctioned. You can achieve this by clearing outstanding loans, not taking other loans simultaneously, or boosting income in terms of side income or bonus. Another way is borrowing a loan to consolidate high-interest loans, reducing monthly outgo and enhancing your FOIR ratio.

FAQs

1. Is the FOIR consistent with all banks and NBFCs?

No, FOIR ratios are not hugely disparate between lenders, but one less than 50% is usually aimed for when seeking personal loans.

2. Is a high credit rating more significant than a high FOIR?

A very good credit rating is always desirable, but even a high FOIR might limit the quantum of the loan or affect approval as repayment capability is considered by lenders.

3. How do I calculate my FOIR before applying for a loan?

You may calculate this yourself by summing up all EMIs and then dividing them by your net monthly income, or some banks have FOIR calculators on their website.