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

Have you heard about FOIR (fixed obligation to income ratio)? If you haven’t already, it’s better to understand this as it plays a crucial role in getting your personal loan. Simply put, FOIR is nothing more than an individual’s debt-to-income ratio.

FOIR is determined by a formula that aggregates the potential borrower’s total monthly debt, including existing EMIs (Equated Monthly Installments) on loans, credit card bills and other debts, divided by total monthly income.

A lower FOIR will result in you getting a significantly lower amount of personal loans, or not getting a loan at all. Here are some details to consider about FOIR to get the personal loan amount you need.

The impact of FOIR on loan approvals

FOIR is a numerical representation that shows how much debt you owe relative to your income. It serves as a guideline for banks and financial institutions in processing your loan. Understanding how FOIR works in personal loan approval is critical for potential borrowers.

Typically, an average FOIR falls into the 40%-55% range. At average FOIR levels, 40%-55% of your income goes toward paying off debts and regular obligations, leaving plenty of room to manage your regular expenses.

A lower FOIR significantly increases the chance that your personal loan will be approved. “A lower FOIR indicates that the applicant has a relatively smaller financial obligation compared to monthly income. This implies significant disposable income, thus increasing the borrower’s ability to repay the loan EMI. In such cases, the chances of loan approval are higher,” ICICI Bank said.

Consequently, a higher FOIR shows that the individual has significant debt that significantly limits the disposable income in his/her hands. This is a clear red flag for lenders. Individuals with higher FOIR are less likely to get approved for loans. “A higher FOIR lowers the creditworthiness of the borrower and the loan application may be rejected,” HDFC Bank said.

How is FOIR calculated?

The calculation of FOIR is actually quite simple. It collects an individual’s monthly obligations including EMI payments, credit card bills, living expenses and other expenses. This amount is then divided by the individual’s gross total monthly income and multiplied by 100.

FOIR= Sum of total monthly obligations/gross total monthly income x 100.

However, FOIR calculations do not take into account tax deductions and investments in fixed and recurring deposits. If the individual deserves ₹90000 per month and his/her FOIR is 30%, it means he/she is spending money ₹27000 to meet financial obligations every month.

This gives the person a gross income of € ₹63000 every month. Banks and financial institutions consider individuals with such high incomes compared to their monthly obligations as ideal candidates for lending.

How can you reduce FOIR?

Banks and financial institutions offer multiple strategies to reduce FOIR. Here are some ways to lower your FOIR and increase the chances of your personal loan being approved.

Applying for a joint loan: You can apply for a joint loan as it allows you to share the EMI burden. This will also significantly reduce individual FOIR and increase the chances of your loan being approved.

Ensure a good credit history: A good credit history is absolutely essential for obtaining a loan. No matter how high your FOIR or debt burden is, you must pay your EMIs and credit card bills on time. This way you can ensure that your credit score is not affected. A good credit score significantly improves your eligibility for a loan.

Reduce multiple loans: One of the main reasons for a high FOIR is your increased debt levels. This may be due to paying off multiple loans at the same time. It’s not a good idea to have too many loans anyway, as this will seriously affect your credit score and your ability to borrow. Individuals with multiple loans should reduce these by paying off non-priority loans at the earliest. These include BNPL (Buy Now, Pay Later) loans and products purchased with zero interest EMIs.

Improve revenue streams: Having multiple income streams is a good way to increase your FOIR. But it’s easier said than done, especially for salaried workers. You can invest the surplus you have in assets that offer a stable return. You can also focus on avenues where your skills will provide you with additional income.

Allirajan M is a journalist with more than twenty years of experience. He has worked with several leading media organizations in the country and has been writing about mutual funds for almost sixteen years.