Many factors affect personal loan approval. While credit score and income are well-known, some lesser-known ones are just as important. One of these is FOIR, or Fixed Obligation to Income Ratio. It might sound a bit technical, but it’s actually a simple concept. Lenders use it to figure out how much of your income is already tied up in paying off other loans or commitments and whether you can handle taking on more debt. Let’s take a closer look at what FOIR is and why it plays such a big role in your loan approval process.
What is FOIR?
FOIR, or Fixed Obligation to Income Ratio, is basically a way for lenders to check how much of your monthly income is already being used to pay for things like loan EMIs, credit card bills, or other fixed expenses. It helps them figure out if you can comfortably handle another loan.
The calculation of FOIR
Here’s how the Fixed Obligation to Income Ratio (FOIR) is calculated:
FOIR = (Net Monthly Income/Total Fixed Monthly Obligations) X 100
Where:
Total fixed monthly obligations: This includes all monthly EMIs for existing loans (personal, home, car, etc.), credit card dues and any other recurring fixed payments.
Net monthly income: This is your income after deducting taxes and other statutory deductions.
Example
Net monthly income = ₹50,000
Total fixed monthly obligations (e.g., EMI + credit card dues) = ₹20,000
FOIR = (50,000/20,000) X 100 = 40%
In this case, your FOIR is 40%, meaning 40% of your income is already committed to fixed obligations.
Impact of FOIR on personal loan application
- High FOIR: A Red Flag for Lenders
If your FOIR is high (above 40%), it means a big chunk of your income is already going toward things like EMIs or credit card bills. Lenders see this as a risk because it looks like you may struggle to handle more debt. It could result in loan rejection or higher interest rates.
- Low FOIR: A Positive Indicator
A low FOIR (below 40%) signals that you have fewer financial commitments relative to your income. Lenders are more likely to approve your loan as you have sufficient capacity to handle additional EMIs. This may also improve your chances of negotiating better loan terms, like lower interest rates.
- Ideal FOIR: The Sweet Spot
An ideal FOIR is typically in the range of 40–50%, depending on the lender. It shows a balanced financial profile—your income is enough to cover both existing obligations and new EMIs, without overextending your finances.
Tips to reduce FOIR
If your FOIR is on the higher side, it could hurt your chances of getting a personal loan. But don’t worry; there are simple ways to lessen it and improve your financial standing. Here are some practical tips to help you:
- Pay off smaller debts
Start by clearing off smaller debts like credit card balances or short-term loans. These payments often take up a significant chunk of your monthly income. Once they’re gone, you’ll have more room in your budget, and your FOIR will drop automatically.
- Consolidate your loans
If you’re juggling multiple loans, think about consolidating them into one. This means combining them into a single loan with a lower EMI. You can use a personal loan EMI calculator to check what your monthly outgo be to decide on the right tenure for your consolidated loan. It’s easier to manage and reduces your monthly fixed expenses. For example, balance transfers can help you get better interest rates and lower EMIs.
- Boost your income
Another way to lower FOIR is by increasing your income. This could be through a side hustle, freelance work or asking for a raise at your job. A little extra income can make a big difference in balancing your obligations and bringing down your FOIR.
- Hold off on new loans
Avoid taking on new loans while you’re trying to manage your existing ones. Every new loan adds to your monthly commitments and pushes your FOIR higher. It’s better to focus on reducing your current obligations first.
- Go for longer loan tenures
If you’re finding it hard to manage your FOIR, consider opting for longer loan tenures. This reduces your monthly EMI, helping you reduce your fixed obligations. Just keep in mind that longer tenures may increase the total interest paid, so weigh your options carefully.
Last word
Bringing down your FOIR is one of the best ways to improve your chances of getting a personal loan. But if that feels tough, you can also think about applying for a joint loan. Having a co-applicant with a steady income can make a big difference and show lenders you can handle the repayment. So, take charge of your FOIR, and you’ll be all set to get that loan approved!
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