Understanding FOIR and Its Role in Personal Loan Approval
When applying for a personal loan, the Fixed Obligation to Income Ratio (FOIR) is a critical factor lenders consider. FOIR essentially measures the proportion of your income allocated to repaying existing debts. Understanding and managing your FOIR is key to improving your chances of loan approval.
What is FOIR?
FOIR is a financial metric used by banks and lenders to assess your debt-to-income ratio. It’s calculated by dividing your total monthly obligations—such as EMIs, credit card bills, and other recurring debts—by your gross monthly income and multiplying the result by 100.
Formula:
FOIR = (Total Monthly Debt Obligations / Gross Monthly Income) × 100
For example, if your monthly income is ₹90,000 and your monthly obligations amount to ₹27,000, your FOIR would be 30%. This means 30% of your income is dedicated to financial commitments, leaving you with ₹63,000 in disposable income. A lower FOIR is generally preferred by lenders, as it indicates a healthier financial standing.
The Impact of FOIR on Loan Approvals
FOIR directly affects your loan eligibility. Lenders typically consider an FOIR between 40% and 55% as acceptable, meaning a reasonable portion of your income is available for essential expenses after meeting debt obligations.
- Low FOIR: A low FOIR suggests that you have sufficient disposable income to handle additional debt. This improves your creditworthiness and increases the likelihood of loan approval.
- High FOIR: A high FOIR indicates significant financial obligations, leaving little room for new debt. This raises red flags for lenders and may lead to loan rejection.
Strategies to Lower FOIR
If your FOIR is high, here are a few ways to reduce it and improve your chances of loan approval:
- Opt for a Joint Loan: Sharing the financial responsibility with a co-applicant reduces your individual FOIR, making you a more attractive candidate for lenders.
- Build a Strong Credit History: Ensure timely payment of EMIs and credit card dues to maintain a good credit score, which can offset the impact of a high FOIR.
- Pay Off Existing Debts: Prioritize repaying smaller or non-essential loans, such as zero-interest EMIs or BNPL schemes, to reduce your debt burden.
- Increase Your Income: Explore opportunities to diversify your income, whether through investments or side gigs, to improve your debt-to-income ratio.
By managing your FOIR effectively, you not only increase your loan approval chances but also establish better financial stability.
