Last Updated on February 20, 2023 by admin
Deciding your eligibility for a personal loan is the initial step that a bank lender takes while considering your application for a personal loan. For evaluating your personal loan application, all lenders go through your credit score, monthly income, current loans, and employment history to assess your repayment capacity.
FOIR’s full form is a fixed obligation to income ratio, which is included in the evaluation assessment of most lenders. Let’s understand here what FOIR is and how you can calculate it when availing of a personal loan.
What’s a FOIR?
In simple terms, FOIR is the fixed monthly cash outflow as a percentage of your month-on-month income. The outcome is your monthly disposable income, which is utilized by lenders to understand your repayment potential. As the personal loan is unsecured in nature, lenders are usually cautious when assessing your credit history and profile. The default risk is higher may be higher owing to the non-presence of security in personal loans. Thus, FOIR plays an important role in deciding your eligibility for a personal loan. FOIR is also called debt to income ratio or DTI and involves monthly payable EMIs against monthly income.
Also Check: Bajaj personal loan status
How’s FOIR computed on a personal loan?
Lenders use the following formula of FOIR for calculating your FOIR –
Fixed obligation to income ratio or FOIR = Overall fixed monthly obligation / net salary (monthly) X 100.
Read on the example to better understand what FOIR is.
Mr Y wants to avail of a personal loan equaling Rs 10 lakh for a repayment tenure of five years. His net income (monthly) equals Rs 1 lakh, and listed below are his fixed payables for a month –
∙ Rs 5,000 towards car loan EMI
∙ Rs 21,500 towards home loan EMI
Post using the online personal loan calculator, Mr Y finds that his monthly EMI for the loan proceeds must be Rs 21,742.
FOIR computation is – (5,000 + 21,500 + 21,742) / 1 lakh X 100 = 48.24 per cent
Ideally, your fixed obligation to income ratio or FOIR must range anywhere between 40 per cent and 50 per cent, which means your overall monthly obligation must not surpass the 50 per cent mark of your monthly income (net). In case you are one of those with a higher monthly income (net), lenders may even consider your FOIR to go as high as 60 per cent – 70 per cent.
How can FOIR impact your approval for a personal loan?
Having as well as maintaining a lower FOIR may assist you in managing your finances well. Not just does it enhance your disposable income (monthly), but it even lowers your overall liabilities and ameliorates your loan repayment potential.
Such parameters are instrumental in availing of personal loan approval as they decide your credibility to lenders, thus ameliorating your chances of availing a speedy approval.
In what ways can you lower your FOIR?
There are certain ways using which you may lower your FOIR to enhance your chances of getting a personal loan.
Avoid availing of multiple loans
If you are one of those individuals who can effectively manage your finances, you may be considered a trustworthy individual by the lender. However, if you have several loans like a car loan, business loan, home loan etc., lenders may consider that you are exceedingly leveraged and might not be able to manage more debt repayments as adding on more debts to your portfolio may burden your finances and lower your repayment capacity, making you prone to EMI defaults.
For instance, suppose you already have a personal loan from Axis Bank, a home loan from HDFC bank and a business loan from ICICI bank, and now you approach Bajaj Finance for another personal loan to use as working capital for your business. Here, Bajaj Finance may hesitate to provide you with a personal loan, given you already hold 3 loans. In case, even if Bajaj Finance approves your personal loan application, it may approve it at a higher Bajaj personal loan interest rate. Note that you can check your Bajaj personal loan statusby either approaching the lender through call or email. Usually, it takes nearly 2 to 7 days for a personal loan to be approved and sanctioned to your bank account.
In case there are several loans running, it might be recommended to consolidate the loan into one loan and opt for a repayment instalment EMI, which is lower as compared to the EMI instalment of all the credit options put together that you are consolidating.
Aim to have a low credit utilization ratio (CUR) on your credit cards
CUR is basically the amount which falls in between the credit that you use and the credit amount available to you. Holding a CUR of within 30 per cent may enhance your chances of securing personal loan approval.
Here’s how you can lower your FOIR – tips
∙ Try placing a request for a personal loan with a co-application who is working like your parent, sibling, spouse, etc. As the loan EMI load is shared, you get a better chance of personal loan application approval.
∙ Keep your credit history position for all your credit options. Credit card transactions, loan EMIs, overdraft option repayments, etc., are a few examples of credit options.
∙ Credit usage ratio must be within 30 per cent. Ensure not to exceed this recommended limit, as doing so shows you as a credit-hungry individual, which discourages lenders from lending to you.
∙ Lenders prefer to provide you with a loan if you manage your money in a wise manner. If you have availed of several loans, like personal loans, home loans, car loans, etc., it might be looked upon as a hint that you cannot manage your finances well.
∙ If you are one of those who constantly switch your employer in a short time span, lenders might consider you as an unfavourable individual seeking a personal loan and may deny your profile.
By now, you must have understood all about FOIR and how it can impact your application for a personal loan. In case you are in for a personal loan deal, ensure to compare amongst different lenders and opt for the one offering you the lowest interest rate and processing charges at favourable terms and conditions.