Several factors are considered while approving a loan, especially in the case of Personal Loan approval. Each bank sets specific parameters based on which the eligibility of the applicant is checked. Fixed Obligation to Income Ratio (FOIR) is one such parameter.
In this article, let us dive further into this ratio and learn how it impacts a Personal Loan application.
What is FOIR?
It is one of the parameters considered by banks to analyse the loan eligibility of the applicant. FOIR is calculated in relation to the Equated Monthly Instalments (EMI).
As the name suggests, FOIR is the debt-to-income ratio of an individual. It gives the lender a better idea of the debt status of the applicant and how much disposable income they hold.
How does FOIR affect a Personal Loan approval?
The average FOIR for a credible borrower is between 40 % to 55 % and may vary for high-net-worth borrowers.
If the applicant has a lower FOIR, the applicant has a lesser financial obligation than his monthly income. This means he is a large chunk of disposable income with him and is capable enough to repay Loan EMI. In such a case, the chances of loan approval are higher.
In contrast, a higher FOIR reflects that the applicant is heavy in debt and may not have enough disposable income to repay the loan. A higher FOIR lowers the creditworthiness of the borrower, and the loan application may be rejected.
How is FOIR calculated?
FOIR calculation is simple. The formula totals the monthly debts of the applicant, including existing EMI payments, Credit Card bill amounts, rent, and living expenses. This sum is divided by the gross total monthly income of the applicant and multiplied by 100.
FOIR = (Sum of total debt/totally monthly income) x 100
Note: FOIR calculation does not take tax deductions and contributions to Fixed Deposits and Recurring Deposits into consideration while calculating the total debt amount.
Now lets us understand how FOIR is used to determine the EMI repayment capacity of an applicant with the help of an example.
For instance, the monthly income of an applicant is INR 60,000. And his/her FOIR is 30% that means he can pay INR 30,000 to clear his debts every month. Now, if he has existing EMI Payments of INR 5,000 and INR 4,000, respectively. His total debt month will be INR 9,000.
After clearing the EMI payments, the disposable income at hand will be INR 21,000. The eligibility of the applicant to pay the current EMI loan amount will be calculated, keeping this disposable income in mind.
Read more on all you need to know about EMI here.
What are the ways to reduce FOIR?
Apply for a joint loan – When you can apply for a joint loan. The EMI amount gets divided between the two applicants.
Maintain a healthy credit history – Always keep your credit history clear and strong. Make timely payments and try to have a lower credit utilisation ratio.
Avoid having multiple loans – It gives the impression that you are always in debt and cannot manage your finances well. This makes the lender uncertain about the loan paying capacity of the borrower.
While applying for a Personal Loan, knowing the FOIR meaning and its role in the loan approval process is crucial. Maintaining a healthy FOIR can help fast track your loan approval process. Furthermore, it also boosts your financial standing.
To apply for an HDFC Bank Personal Loan, click here.
*Terms and conditions apply. Personal Loan at the sole discretion of HDFC Bank Limited. Loan disbursal is subject to documentation and verification as per Banks requirement. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.