Fixed Obligations to Income Ratio (FOIR)

Before sanctioning a loan, all financial institutions, including banks, have a set of very stringent eligibility criteria. When a person applies for a personal loan or any other type of loan, he or she must go through a series of multifaceted checks before the loan can be disbursed.

This is due to the fact that the ability to repay a loan is an important factor in determining whether or not an individual is eligible for the loan. If this parameter is not validated, the bank may incur losses as a result of a candidate's failure to repay a loan due to non-performing assets or bad debts.

To avoid such complications, financial institutions conduct thorough background checks on the applicant, including his or her income documents, credit repayment history, assets, financial liabilities, and other components that can affect the individual's loan repayment ability.

 Let’s start by understanding what is the eligibility for a loan and how does FOIR affects that.

What is FOIR?

To determine a person's eligibility for a loan, banks calculate three deciding factors or ratios based on his or her net income:

  • Fixed debt-to-income ratio (FOIR)

  • Loan-to-value (LTV) ratio (LTV)

  • The ratio of installment income (IIR)

FOIR full form is ‘Fixed obligations to income ratio.' It is the most commonly used parameter by lenders to determine an applicant's loan eligibility. In layman's terms, it's the debt-to-income ratio.

Lenders examine potential loan borrowers' financial histories to determine whether or not they will be able to repay the loan.

FOIR should be in the 40% to 55% range on average. Borrowers' ability to repay loans is the most important factor to consider when approving a personal loan. When it comes to loan approval, there are eligibility criteria that must be met.

Lenders must ensure that borrowers have the financial capacity to repay the borrowed loan on time and in accordance with the agreed-upon equated monthly installments (EMIs).

As a result, an applicant's FOIR becomes the deciding factor in whether or not a loan application is processed. A lower FOIR indicates that the applicant's net monthly obligations are significantly less than their income. This indicates that the applicant has a higher repayment capacity.

As a result, the lower the FOIR, the better your chances of loan approval. A low FOIR indicates that you have fewer obligations and are not heavily in debt. As a result, it automatically increases your disposable income by increasing your repayment capacity. It also demonstrates that you are a responsible borrower who is not in a lot of debt.

Lenders examine your credit history, income sources, assets, and liabilities. Lenders examine every detail of the applicant's income as well as the installments of any current loans that are still being paid.

When lenders review FOIR, they also collect information such as the applicant's credit history, income, savings history, annual tax, and so on.

The Effect of FOIR on Loan Eligibility

Before applying for any type of loan, it is critical to understand how FOIR affects loan eligibility. Many people are turned down by lenders because they fail to consider their FOIR.

When a person has a higher FOIR, it simply means that he or she has a lot of existing obligations. This factor may work against him or her when applying for a loan from a lender. 

A lower FOIR, on the other hand, indicates that an individual has fewer existing obligations (Loan or credit card EMIs), resulting in better repayment capacity and higher approval chances, etc. We're going to tell you all about them in great detail. 

When It Comes to Personal Loans, How is FOIR Calculated?

We now know that FOIR has a direct impact on personal loan eligibility. Lenders must be confident in the borrower's ability to repay the loan, and this is how they evaluate FOIR:

Total debt / monthly salary = FOIR

FOIR calculation formula is the same as its full name - fixed obligations to income ratio. It is calculated by dividing all existing expenses by all income. The total is multiplied by 100. All expenses include fixed and variable monthly expenses, credit card payments, existing EMIs, and so on. Salaries, rental income, and so on are all included in total income.

What are Some Methods for Reducing FOIR?

There are a few checks you can perform at the end of the process to ensure a successful personal loan application:

  • A loan made in collaboration - Consider applying for a personal loan with a co-applicant who is a working spouse, parent, or sibling. You have a better chance of getting a loan because the EMI burden is divided in this case. 

  • Debt repayments are made on time - You must strive to keep a positive credit history for all of your debts. This includes EMIs, credit card payments, overdraft repayment, and other similar items.

  • Credit Utilization Ratio Is Low - The credit utilization ratio is the ratio of your credit amounts to the total amount of credit available to you. Before applying for a personal loan, this should be kept under 30% as a general rule. If a potential borrower's credit utilization ratio is consistently high, a personal loan application is more likely to be denied.

  • Avoid Taking Out Multiple Loans - Lenders prefer to lend to people who can manage their finances well. If a borrower has taken out multiple loans, such as personal, home, and so on, it may be interpreted as a sign that the borrower is unable to manage his finances well.

  • Avoid Frequent Job Changes - If a potential borrower has changed jobs frequently in a short period of time, lenders may view this as a negative profile for personal loans.

Is There a Standard FOIR for All Banks?

While the Fixed Obligations to Income Ratio margin varies from lender to lender and in each scenario, the required FOIR of an individual for loan eligibility for most banks ranges from 40% to 60%. However, for a customer with an extremely high net worth, this can rise to 65% to 70%.

How to Apply for a Personal Loan?

After gathering the necessary documents, you can easily apply for a personal loan online. You only need to do one thing.

  • On this page, click the Apply Now button.

  • Enter your information with care.

  • Enter the loan amount and term you require. To make an informed decision, we recommend that you use our online personal loan calculator.

  • Upload documents and submit.

Once you have these personal loan documents in order, you can apply for a personal loan online.

We've seen all of the factors that influence FOIR, as well as the significance of FOIR, which is the most important factor for lenders to consider when determining your personal loan eligibility. Maintaining a good credit history is essential for lowering your FOIR and getting a personal loan quickly.