Meaning Of FOIR And Its Effect On Personal Loan Approval

A personal loan offers one of the easiest ways in which a person can get credit without having to provide any collateral to a bank or a non-banking finance company.

A personal loan can come in really handy when one is faced with a tough situation like a steep medical bill or an unplanned home repair or an escalation on a wedding expense for which one may not have been prepared for.

Not only is a personal loan uncollateralized, it is also one of the quickest to avail. These days, like most other things, personal loan applications too have gone digital and one can now apply for a loan from anywhere, without having to visit the lender’s branch.

One can even upload all the documents online and once verified, the money can be disbursed in a matter of hours or a day or two at the most. Moreover, even the repayment process is completely paperless and can be similarly done online.

While getting a personal loan approved, several factors are considered by the lender which can be a bank or a non-banking finance company. One such factor that the lenders consider is the Fixed Obligation to Income Ratio (FOIR).

What Is FOIR?

The FOIR is essentially the debt-to-income ratio of an individual borrower. It gives the bank or the NBFC an idea of the state of the borrower’s indebtedness and how much disposable income they currently have.

The higher someone’s disposable income, the better their chances of getting the personal loan at the best possible rate of interest. A higher disposable income gives the lender the comfort that the borrower has enough monthly income to be able to pay off their EMIs without any stress. FOIR Is typically calculated in relation to the EMI outgo.

How FOIR Impacts Personal Loan Approval

For a borrower to be considered credible, the average FOIR is between 40% and 55%.

Borrowers with a lower FOIR have a lower financial obligation than their monthly income. This basically means they have a higher disposable income than their financial obligations require them to have. And that, in turn, means, they are not a risk for the lender, as they will be able to pay their EMIs more easily than borrowers with higher FOIR.

So, for people with a lower FOIR, the chances of loan approvals are higher.

A higher FOIR means that the person’s indebtedness is higher and so they have lower disposable income. This means that they will find it relatively tougher to pay their EMIs and so could either end up delaying repayments or even defaulting on them. So, such borrowers pose a higher risk to lenders.

How Is FOIR Calculated?

The FOIR is calculated by totalling all the monthly debts of the borrower including credit card debt, existing EMI payments, rent and other living expenses. This total amount is divided by the gross monthly income of the borrower and then multiplied by 100 to arrive at a percentage figure.

FOIR = (Sum of total debt/totally monthly income) x 100

Tax deductions and contributions to fixed deposits and recurring deposits are, however, excluded from this calculation.

How Can One Bring Down The FOIR?

There are several ways in which a borrower can bring down their FOIR. These include:

Have A Healthy Credit History:

Borrowers should always have a clear and clean credit history and should repay their loans in time and in full. They should also try and have a lower credit utilization ratio.

Not Have Multiple Loans:

If lenders see multiple loans against a person’s name, they get the impression that the person is always in debt and cannot manage their finances. This reduces their chances of getting their next loan application approved as the lender becomes uncertain about their ability to repay the loan.

Apply With A Co-Applicant:

Bringing a co-applicant can help as the EMI gets divided among both the applicants and so the burden on each applicant goes down. This can help bring down the FOIR and improve one’s chances of getting a loan application approved.

Conclusion

The FOIR can play a crucial role in determining if a person can get a personal loan or not. A lower FOIR ratio is better as it means a borrower has a higher disposable income to pay off the EMI.

Good lenders like IIFL Finance provide personal loans ranging from Rs 5,000 to Rs 5 lakh through a simple, online process. IIFL Finance also offers the most competitive interest rates to borrowers with the best credit history and low FOIR. A lower interest rate helps in bringing down the borrowing cost and saves you a good amount of money.