What is FOIR and How to Calculate for Personal Loans?
5 min read | 5 months ago
What is FOIR and How is it Calculated for Personal Loans?
At times in unexpected situations, personal loans are the best solution to meet cash crunches. But, if you're probably thinking about taking out a personal loan, there is something very important that you should know. What is it? Well it’s something called FOIR. So, what exactly is it, and why does it matter when you're applying for a loan? Well, worry not! We're here to break it down for you in simple terms.
What is FOIR?
FOIR stands for Fixed Obligation to Income Ratio. It might seem like a very complicated idea, but actually it is quite a simple aspect. Simply put, FOIR is a standard used by mortgage providers to gauge your ability to repay a loan. It is based on calculations from your current salary and any other financial commitments. How does it work? Don’t worry. We’ll go into this in detail.
Here's how it works. When you apply to get a personal loan, the lender wants to ensure that you can comfortably repay it without stretching yourself too thinly financially. So they take a look at your income and all of your current loan repayments including EMIs (Equated Monthly Instalments) from any loans still outstanding or credit card debts.
Putting these two factors together, they divide fixed obligations (such as the EMIs for loans and credit card bills) by net regular earnings in order to come up with a percentage. This is FOIR for you.
For example, if your total EMIs and other fixed obligations amount to ₹20,000 per month, and your monthly income is ₹50,000, your FOIR would be (20,000/50,000) x 100 = 40%.
How Does FOIR Affect Personal Loans?
Now, you might be wondering, why does FOIR matter when you get a personal loan? Well, it's a crucial factor that lenders consider before approving your loan application.
Here's why:
1. Risk Assessment: Lenders use the FOIR measure of risk involved in lending to you. If your FOIR is high, a large portion of your income is probably already spoken for by pre-existing debts which leaves little disposable income with which you can pay back any new loans. This raises questions about your ability to handle additional debt in a responsible and stable manner.
2. Loan Eligibility: Different loan lenders have different FOIR prerequisites but generally speaking they prefer a borrower with lower FOIR. If your FOIR is too high, the loan lender may turn you down or offer a smaller loan to make sure that what you owe in total remains manageable.
3. Interest Rates: Even if your loan application is approved with a high FOIR, you might end up paying a higher interest rate. Lenders may perceive you as a higher-risk borrower and charge you accordingly to compensate for the increased likelihood of default.
4. Loan Repayment Tenure: In some cases, lenders might extend the repayment tenure to reduce the EMI burden and accommodate a higher FOIR. However, opting for a longer tenure means paying more interest over the loan's lifetime, so it's essential to weigh the pros and cons before making a decision.
Conclusion
In conclusion, FOIR plays a crucial role in the personal loan approval process. It helps lenders assess your repayment capacity and determine the risk associated with lending to you. If you are looking for personal loan, to improve your chances of approval and secure better terms, aim for a lower FOIR by managing your existing debts wisely and ensuring that your income comfortably covers your financial obligations.
Remember, a personal loan can be a helpful financial tool when used responsibly, but it's essential to borrow within your means and avoid overstretching your finances. So, before you apply for that loan, take a moment to calculate your FOIR and assess whether you can comfortably afford the additional debt. Your future self will thank you for it!
FAQs
1. What is FOIR and why is it important for personal loans?
FOIR stands for Fixed Obligation to Income Ratio. It's a crucial factor in loan approval, indicating the portion of your income dedicated to fixed obligations like loan repayments, ensuring you can manage new debt responsibly.
2. How is FOIR calculated for personal loans?
To calculate FOIR, sum up all your fixed obligations (existing loan EMIs, credit card payments, etc.) and divide by your gross monthly income. Multiply the result by 100 to get the FOIR percentage.
3. What FOIR is considered acceptable for personal loan approval?
Lenders typically prefer FOIR below 40-50% to ensure borrowers have sufficient income to meet new loan obligations comfortably. Higher FOIR may indicate financial strain, potentially affecting loan approval or terms.
4. Can I improve my FOIR to enhance my chances of personal loan approval?
Yes, you can improve FOIR by either increasing your income or decreasing existing fixed obligations. Paying off debts, avoiding new credit, or increasing income through additional sources are effective strategies to lower FOIR and enhance loan eligibility.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
