What is FOIR and How is It Calculated?

What is FOIR?

Let us start by understanding what FOIR is. The full form of FOIR is ‘Fixed obligations to income ratio’. It is the most commonly used parameter by lenders to determine the loan eligibility of an applicant. In simpler words, it is the debt-to-income ratio. Lenders analyse the financial history of potential loan borrowers in order to check whether they will be able to repay it or not.

On an average, FOIR should be between the range of 40% to 55%. Borrowers’ capacity to repay loans is the most important basis of consideration for a personal loan. There are eligibility criteria to be met when it comes to approving loans. Lenders have to ensure that borrowers have the financial capacity to repay the borrowed loan in time as per committed equated monthly instalments (EMIs).

Thus, an applicant’s FOIR becomes the cornerstone of deciding whether to process a loan application. Lower FOIR means that the applicant’s net monthly obligations are significantly lower than their income. This reflects a better repaying capacity of the applicant. Thus, lower the FOIR, the higher are your chances of loan approval. If you have a low FOIR, it highlights that you have fewer obligations and are not heavily in debt. It therefore automatically increases your disposable income by enhancing your repaying capacity. It also shows that you are a responsible borrower who is not deeply in debt.

Lenders analyse your credit history, sources of income, assets, and liabilities. Lenders look into every detail of income as well as instalments of all current loans the applicant is still paying. So once lenders check FOIR, they even gather details like credit history of the applicant, income, savings history, annual tax, etc. 

How is FOIR Calculated?

The FOIR calculation is relatively simple.

The monthly debts of an applicant are gathered from factors such as monthly EMIs, Credit Card Bills, and any other form of debt that the applicant is obliged to pay on a monthly basis. The debt is divided by the applicant's net monthly income and then multiplied by 100 to calculate the FOIR.

What are the Ways in Which FOIR Can Be Reduced?

There are a few checks you can complete at your end itself, for a successful personal loan application:

1. Joint loan
   You can consider applying for your personal loan with a co-applicant, who is working and is a spouse, parent or sibling. You then have higher chances of loan approval because, in such a scenario, the EMI burden is divided. 
2. Timely Repayments of Debts 
   You must try to maintain a healthy credit history towards all your debts. This includes EMIs, credit card payments, overdraft repayment, etc. 
3. Low Credit Utilization Ratio
   The credit utilization ratio is the ratio between your credit amounts to the maximum credit that is available to you. As a thumb rule, this should be kept under 30% before applying for a personal loan. If the potential borrower’s credit utilization ratio is consistently high, then it is more likely that a personal loan application will be rejected.
4. Avoid Multiple Loans
   Lenders want to lend to individuals who can manage their finances well. If a borrower has taken multiple loans like personal, home, etc, then it’s possible that it is looked at as a sign that the borrower is not able to handle his finances well. 
5. Avoid Frequent Job Switches
   If a potential borrower has switched many jobs over a very short period of time, then lenders may consider such a profile as a negative profile for personal loans.

How to Go About a Personal Loan?

You can apply for a personal loan online easily after arranging the documents required for it. All you have to do is

1. Click the apply now button on this page
2. Enter your information carefully
3. Enter the loan amount you need and select a tenure. We recommend using our online personal loan calculator to help you make an informed decision.
4. Upload documents and submit.

Documents Required for a Personal Loan:

1. Application Form and a recent photograph
2. Identity proof (passport, voter ID, PAN card, driving license)
3. Address proof (ration card, telephone bill, electricity bill, rental agreement, driving license, passport, bank statement, passbook)
4. Age proof (PAN card, passport)
5. Bank statement for the last 6 months
6. Salary slips of the past 3 months and appointment letter (for salaried applicants)
7. For self-employed, income statements and other financial documents for the last 2 years attested by a Chartered Accountant
8. For SME, audited financials for the past 2 years 

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

We have seen all the factors that impact FOIR and we have seen the importance of FOIR, which is the most important factor for lenders to decide your personal loan eligibility. Maintaining a healthy credit history is the key to lower your FOIR and get a personal loan easily.

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