What is FOIR and How is it Calculated for a Personal Loan

What is FOIR and How is it Calculated for a Personal Loan

Introduction

When applying for a personal loan in India, lenders evaluate various factors to assess your creditworthiness. One crucial aspect they consider is your Fixed Obligation to Income Ratio (FOIR). FOIR plays a significant role in determining your loan eligibility and repayment capacity. As a financial expert, I will explain what FOIR is and how it is calculated for a personal loan in India.

Understanding FOIR

FOIR, or Fixed Obligation to Income Ratio, is a measure used by lenders to assess an individual's ability to repay a loan. It determines the proportion of an applicant's monthly income that goes towards servicing existing debts, including the applied loan installment.

Calculation of FOIR

To calculate FOIR, lenders consider two key components: fixed obligations and monthly income.

Fixed Obligations: Fixed obligations include all recurring monthly payments, such as existing loan EMIs (Equated Monthly Installments), credit card payments, insurance premiums, and any other ongoing financial commitments. It does not include variable expenses like utility bills, groceries, or entertainment expenses.

Monthly Income: Monthly income refers to the total earnings of an individual within a month, which includes salary, business income, rental income, or any other regular sources of income. It is essential to provide accurate documentation to support the income claimed.

Formula for FOIR Calculation: FOIR is calculated using the following formula:

FOIR = (Sum of Fixed Obligations) / (Monthly Income) * 100

Example: Let's say a borrower has existing monthly obligations of INR 20,000 and a monthly income of INR 60,000. Using the FOIR formula, the calculation would be as follows:

FOIR = (20,000 / 60,000) * 100 FOIR = 33.33%

Interpretation of FOIR: Different lenders may have varying FOIR requirements based on their risk appetite and lending policies. Generally, a lower FOIR indicates a healthier financial position and higher loan eligibility. A FOIR below 40% is typically considered favorable by most lenders.

Implications of FOIR on Personal Loan Eligibility: Lenders use FOIR as a risk assessment tool to determine the loan amount they can offer you. A higher FOIR implies a significant portion of your income is already allocated towards existing obligations, leaving less capacity to take on additional debt. This could potentially impact your loan eligibility or result in a lower loan amount being sanctioned.

Tips to Improve FOIR and Loan Eligibility:

Pay off existing debts: Clearing outstanding debts or reducing EMIs can improve your FOIR and increase your loan eligibility.

Increase income: Explore opportunities to increase your income through salary hikes, promotions, or additional sources of income.

Minimize new debt: Avoid taking on new loans or increasing credit card utilization while applying for a personal loan.

Correct errors: Regularly review your credit report and rectify any errors that might negatively impact your FOIR.

Conclusion

Understanding the concept of FOIR and how it is calculated is crucial when applying for a personal loan in India. Lenders use FOIR to evaluate your repayment capacity and assess the risk associated with granting you a loan. By managing your fixed obligations, increasing your income, and maintaining a healthy FOIR, you can enhance your chances of securing a personal loan with favorable terms and conditions. Remember to carefully assess your financial situation and choose a loan amount that you can comfortably repay to avoid any future financial difficulties.