Foir: How Does It Impact Personal Loan Approvals

FOIR (Fixed Obligations to Income Ratio) is a crucial factor used by lenders to assess an applicant’s loan eligibility, particularly for personal loans. It measures the proportion of an individual’s income that is committed to existing financial obligations, such as other loan EMIs, credit card payments, rent, or any other fixed expenses. The FOIR helps lenders determine whether the borrower can comfortably manage additional debt from a new loan.

How FOIR Impacts Personal Loan Approvals:

1. Loan Eligibility:

1. Lenders use the FOIR to assess whether you have sufficient disposable income to take on a new loan. A lower FOIR means you have more free income available to repay the new loan, increasing your chances of loan approval.
2. If your FOIR is too high, lenders may consider you overleveraged, meaning most of your income is already committed to existing obligations, reducing the likelihood of loan approval.
3. Ideal FOIR for Personal Loan Approval:

2. Typically, lenders prefer a FOIR of around 40% to 50%, meaning that no more than 40-50% of your monthly income should be committed to fixed obligations, including the EMI for the new loan.
3. A lower FOIR increases your chances of getting the loan approved as it shows that you have enough surplus income to repay the new loan comfortably.
4. FOIR and Income Level:

3. Higher-income earners might have a little more flexibility in FOIR, with some lenders willing to approve loans even if the FOIR is slightly above 50%, given the applicant’s higher disposable income.
4. Conversely, for middle or lower-income earners, lenders tend to be more conservative, requiring a lower FOIR.
5. FOIR Calculation:
6. FOIR Formula:
   FOIR = (Sum of all fixed monthly obligations, including proposed EMI) ÷ Net monthly income × 100
   Example: If your monthly income is ₹1,00,000 and you have existing EMIs of ₹25,000 and you’re applying for a new EMI of ₹15,000, your FOIR would be:
   (₹25,000 + ₹15,000) ÷ ₹1,00,000 = 40% FOIR
7. Impact on Loan Amount:

5. If your FOIR is close to the acceptable limit, lenders might offer a lower loan amount to ensure your overall FOIR remains within their desired range.
6. Reducing your requested loan amount or extending the loan tenure to lower the EMI can improve your FOIR, enhancing your chances of approval.
7. FOIR vs. Credit Score:

6. Both FOIR and your credit score are critical factors in personal loan approvals. A high credit score combined with a favorable FOIR significantly boosts your chances of approval.
7. Even with a good credit score, a high FOIR could lead to rejection, as lenders prioritize ensuring you can manage all your fixed financial commitments.
8. Strategies to Improve FOIR:

7. Repay Existing Loans: Paying off existing loans or credit card dues can lower your FOIR, making you more eligible for new loans.
8. Increase Income: Any increase in income (e.g., bonuses, salary increments) can improve your FOIR, as your fixed obligations would constitute a smaller percentage of your total income.
9. Avoid Additional Debt: Minimize new credit card usage or additional loans that can inflate your fixed monthly obligations.

In summary, FOIR is a vital metric for lenders to gauge your repayment capacity. A lower FOIR indicates that you have sufficient disposable income to comfortably handle a new personal loan, increasing the chances of approval. Maintaining a balanced FOIR, along with a strong credit score, improves your financial credibility and loan eligibility.

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