When you apply for a loan, all financial institutions follow certain eligibility standards to qualify applicants for the loan. These include your income level, credit score, current loans, employment history, and other factors to ascertain your repayment capacity. And this is where FOIR calculation comes into the picture.
But what is FOIR and FOIR calculation? And how does it affect your loan eligibility? Let’s know more.
What is FOIR?
FOIR stands for ‘Fixed Obligations to Income Ratio’ and is the most common parameter that lenders use to determine the loan eligibility and creditworthiness of an applicant. Simply put, it is the debt-to-income ratio of an individual. It indicates their disposable income as part of their monthly income, that they can use towards repaying the loan.
For FOIR calculation, the banks consider your monthly income, instalments on any current loans, as well as the potential EMIs of the prospective loan. The lenders have to make sure you have the funds to repay the loan EMIs. Hence, FOIR calculation for personal loans holds much weight while assessing your loan eligibility. Ideally, your FOIR should be between the range of 40% and 55%.
This indicates that your total living expenses should not be more than 55% of your monthly income. Therefore, the lender will consider the remaining amount of your income when deciding on the loan amount you’re eligible for.
FOIR calculation for personal loan
So, what is FOIR in personal loan? FOIR is the total of all your existing financial obligations divided by the net monthly income, multiplied by 100. These monthly expenses include fixed and variable expenses, current EMIs, credit card payments, etc. Similarly, income includes salary, rental income, etc. You can simply use a FOIR calculator online to determine your FOIR ratio.
FOIR calculation is simple. It can be calculated as-
FOIR = (Total monthly expenses/ Net monthly income) X 100
Let’s understand this with an example-
Suppose an individual is applying for a housing loan. The monthly income of an individual is Rs. 90,000. Their monthly financial obligations include Rent of Rs. 12500, an existing loan EMI of Rs. 11,000, and additional miscellaneous expenses of Rs. 17000.
Now, FOIR = (40,500/90,000) X 100 = 45%
So, what is FOIR in a home loan? The lender will consider the FOIR ratio of 45% and the disposable income of Rs. 49,500 to determine the applicant’s eligibility and capacity to repay this housing loan.
What is FOIR in personal loan?
A low FOIR indicates that you have fewer financial obligations to manage, leaving you a significant amount of disposable income to pay off the loan EMI. Thus, improving your repayment capacity. Lenders view such factors as highly favourable, thereby increasing your chances of loan approval.
However, a higher FOIR indicates more expenses and less disposable income to repay the loan. You can use a FOIR calculator online to measure FOIR. If your FOIR is high, you can take the necessary steps to reduce it and better your chances of loan approval.
What is FOIR in a home loan?
Ready to apply for a housing loan and wondering what is FOIR in a home loan? Well, the FOIR ratio can also depend upon the type of loan you’re applying for. Since a home loan is a secured loan, the FOIR requirement for many lenders can also be between 40% to 100%.
How to reduce FOIR?
You can reduce your FOIR with a few simple measures-
- Joint loan
You can apply for a loan with a co-applicant; a working parent, spouse, or sibling. With their combined income, you can improve your chances of loan approval as the EMI now, is divided.
- Avoid multiple loans
Taking too many loans at once increases your financial obligations toward EMI payments. Since lenders prefer individuals who can manage their finances well, too many loans can highly impact your loan approval.
- Repay your debts on time
You must repay all your debts on time to maintain a healthy credit score. This includes your loan EMIs, overdraft repayment, credit card payments, etc.
- Maintain a low credit utilisation ratio
The credit utilisation ratio is the ratio between your credit usage and the maximum credit limit available to you. As a rule of thumb, you should try and maintain this ratio under 30% before you apply for a loan. This will help you manage your FOIR and increase your chances of loan approval.
Over to you
Now that you have the answer to “What is FOIR?”, you can use a FOIR calculator online to calculate and work towards maintaining a healthy ratio for swift loan approval. And if you’re in the market for instant loan, avail Tata Capital Personal Loan!
To know more about our offerings, get in touch with us today!
28 June 2023
4 mins read
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