Lenders verify that a borrower meets the requirements for eligibility and evaluate their creditworthiness before to authorizing a loan. The primary worry of every lender is whether the borrower will be able to return the loan balance.
Lenders examine financial obligations, income, credit history, and other documentation in an effort to lower risk. Lenders compute three distinct ratios based on a borrower’s income to establish eligibility.
These ratios are the loan-to-value ratio (LTV), the installment income ratio (IIR), and the fixed obligation to income ratio (FOIR). We will learn about FOIR definition, computation, and impact on personal loan approval in this section.
FOIR: What is it?
Lenders use a metric called the FOIR (Fixed Obligation to Income Ratio) to evaluate a borrower’s capacity to repay a loan by comparing the borrower’s monthly income to their fixed monthly obligations, such as rent and loan repayments. FOIR, which is reported as a percentage, aids lenders in determining if a borrower can handle taking on more debt in the form of a new loan.
A lower FOIR raises the likelihood of loan acceptance since it reflects a lower current debt-to-income ratio.
All lenders have established specified FOIR ratios, which borrowers must adhere to. The FOIR limit is often between 40% and 50%, however it varies from lender to lender.
How is the FOIR determined?
The applicant’s entire monthly obligations—including rent, living expenses, credit card bill amounts, and any ongoing EMI payments—are divided by their total monthly income and multiplied by 100 to determine FOIR.
FOIR is equal to (Total Outstanding Debt / Monthly Income) times 100.
Generally, a lender’s maximum FOIR limit is determined by the kind of loan. A lower FOIR suggests that you are in a better financial situation, which increases your chances of being approved for a loan.
Example of FOIR Calculation:
Suppose Mr. Y makes ₹50,000 a month in total. His monthly responsibilities consist of a ₹5,000 house loan EMI and ₹10,000 in credit card payments. Currently, Mr. Y is applying for a personal loan; let’s look at the FOIR computation.
Total Debt: 10,000 plus 5,000 equals $15,000.
FOIR is (30%) = (15000/50000) x 100.
Given his 30% FOIR, Mr. Y has a good probability of getting his personal loan approved in this instance.
Factors Affecting Personal Loan FOIR
The following criteria impact FOIR for personal loan approval if you wish to apply for a personal loan online.
- The number of dependents you have is a crucial element that influences your chances of being approved for a personal loan.Your chances of being approved are higher if your household has more earners.
- The two main determinants are income and source of income. It is possible to reduce the FOIR by combining all of the revenue, which will facilitate loan acceptance.
- Your FOIR will rise if you have any past due balances on the loan, which will make it more challenging for you to obtain the loan.
- Your FOIR will rise if you have any liabilities in addition to your usual monthly spending.
- The length of time you have worked for the same company and your job status now establish credibility and influence the acceptance of your personal loan.
Ways to lower FOIR
Greater responsibilities resulting from a higher FOIR lower your chances of being approved for a personal loan. These are some pointers to lower FOIR, which will facilitate obtaining a personal loan.
Examine Current Obligation
Consider your present financial commitments before applying for a personal loan. This covers payments made on credit cards, ongoing loan installments, and other regular monthly commitments like rent. The secret to controlling your FOIR is knowing what firm obligations you currently have.
Lengthened Loan Term
The EMI decreases with a longer loan term. It is advisable that you obtain an extended loan duration since lower EMI equals lower FOIR, which might make it easier for you to receive a personal loan.
Steer clear of several loans
An excessive number of loans results in larger EMI payments, which raises the FOIR and erodes lender confidence. It is best to avoid taking out more than one loan at once.
Boost Your Credit Rating
Better credit history and a decreased default risk are indicated by a higher credit score. You may be able to negotiate better loan conditions, such as a lower FOIR, if your credit score increases.
Conclusion:
The FOIR illustrates the portion of their discretionary income that may be allocated to debt repayment. An average FOIR of between 40% and 55% should be maintained, with monthly costs not to exceed 50% of total revenue.
The ideal option if you’re searching for a personal loan is LoanTap. With little paperwork required, we provide personal loans with reasonable interest rates.
FAQ
Does a co-borrower’s income affect the FOIR for loan approval?
Indeed. Indeed, the income of the co-borrower affects the FOIR computations. An income that is far greater than one’s commitments may raise the likelihood that the loan will be approved.
Are credit scores and FOIR equivalent?
Indeed. No, FOIR and a credit score are not the same thing. Your FOIR determines the proportion of your current debts to your income, but your credit score reflects your reliability based on your credit history.
Can I decrease my FOIR in order to qualify for a loan?
Indeed. You can reduce your FOIR before applying for a personal loan by raising your income or reducing your present fixed commitments.
Does FOIR just apply to those who work?
Indeed. No, FOIR applies to both paid and self-employed workers. Lenders take a borrower’s FOIR into account when determining their loan eligibility.
Which commitments constitute fixed obligations for the purposes of calculating FOIR?
Yes, fixed responsibilities include things like monthly insurance payments, rent, living expenditures, existing loan EMIs, and any other permanent commitments.