What is FOIR and Its Effect on Personal Loan Approval

Posted on Tuesday, January 30th, 2024 | By IndusInd Bank

India, with its diverse culture and rich traditions, has witnessed a surge in personal loans as people seek financial assistance for various purposes. Whether it’s funding a wedding, addressing medical emergencies, or realizing a long-held dream, personal loans have become a go-to financial solution. However, there’s a critical factor that often plays a pivotal role in the approval or rejection of a personal loan application – FOIR or Fixed Obligation to Income Ratio.

What is FOIR?

Fixed Obligation to Income Ratio, commonly known as FOIR, is a crucial parameter that lenders use to evaluate a borrower’s eligibility for a personal loan. It represents the proportion of an individual’s fixed obligations, including existing loan repayments and other fixed monthly expenses, to their monthly income. In simpler terms, FOIR is a measure of your ability to handle additional debt based on your current financial commitments.

How is FOIR Calculated?

The FOIR is calculated by dividing the total fixed obligations by the net monthly income and multiplying the result by 100 to express it as a percentage.

FOIR = (Net Monthly Income/Total Fixed Obligations) × 100

Fixed obligations typically include monthly loan repayments, credit card payments, and other fixed commitments. Lenders use FOIR to assess the borrower’s repayment capacity and determine if they can comfortably manage the additional burden of a new personal loan.

How FOIR Impacts Personal Loan Approval

Understanding the significance of FOIR is crucial for anyone planning to apply for a personal loan. Here’s how FOIR influences the loan approval process.

• Loan Eligibility Assessment:

Lenders use FOIR as a key criterion to assess a borrower’s eligibility for a personal loan. A lower FOIR indicates that a significant portion of the borrower’s income is available for new debt repayment, increasing the likelihood of loan approval.

• Risk Mitigation:

A higher FOIR suggests that a substantial portion of the borrower’s income is already committed to existing obligations, leaving less room for additional debt repayment. Lenders are wary of approving loans with high FOIR to mitigate the risk of default.

• Loan Amount Determination:

FOIR also influences the loan amount that a borrower is eligible to receive. Lenders use FOIR to calculate the maximum EMI (Equated Monthly Installment) that a borrower can afford. This, in turn, determines the loan amount based on the selected tenure and interest rate.

Maintaining a Healthy FOIR for Personal Loan Approval

Now that we understand the significance of FOIR, let’s explore how you can maintain a healthy FOIR to enhance your chances of personal loan approval.

• Evaluate Existing Obligations:

Before applying for a personal loan, assess your existing financial commitments. This includes EMIs for existing loans, credit card payments, and other fixed monthly expenses. Understanding your current fixed obligations is the first step in managing your FOIR.

• Limit Additional Debt:

If possible, try to limit or avoid taking on additional debt before applying for a personal loan. A lower level of existing debt positively impacts your FOIR, making you a more attractive borrower in the eyes of lenders.

• Choose an Optimal Loan Amount and Tenure:

When applying for a personal loan, carefully consider the loan amount and tenure. Opting for a longer tenure might result in lower EMIs, improving your FOIR. However, keep in mind that longer tenures may also lead to higher overall interest costs.

• Improve Your Credit Score:

A good credit score reflects your creditworthiness and can positively influence the loan approval process. Maintain a healthy credit score by making timely payments on existing loans and managing your credit responsibly.

• Provide Accurate Income Details:

Accurate disclosure of your income is crucial for an honest assessment of your FOIR. Include all sources of income and ensure that the information provided aligns with your official income documents.

• Consider Co-borrowers or Guarantors:

If your FOIR is on the higher side, consider involving a co-borrower or providing a guarantor with a strong financial profile. This can boost your application’s credibility and increase the likelihood of approval.

Conclusion

In the realm of personal loans, understanding FOIR is akin to holding the key to a successful loan application. It’s not just a number; it’s a reflection of your financial health and your ability to manage additional debt responsibly. By evaluating and managing your FOIR effectively, you can position yourself as a favorable borrower, increasing the likelihood of approval for that much-needed personal loan. So, before embarking on your loan application journey, unravel the mystery behind FOIR and empower yourself with the knowledge to secure financial assistance seamlessly.

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Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.