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 average, FOIR should be between the range of 40% to 50%. 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, the lower the FOIR, the higher 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 the credit history of the applicant, income, savings history, annual tax, etc.
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 gross monthly income and then multiplied by 100 to calculate the FOIR.
FOIR Formula = (Total Monthly Loan Obligations / Gross Monthly Income) x 100
Sum up all your recurring monthly debt payments. To do this, consider loan EMIs, credit card minimum payments, or any other consistent financial obligations.
Add all your income sources, including monthly salary, rental income, or business profits. Note that gross income refers to earnings before taxes or deductions.
Divide your total monthly obligations by your gross monthly income, then multiply the result by 100 to express it as a percentage.
Example: Assume your total monthly loan obligations sum up to INR 15,000 and your gross monthly income is INR 60,000.
Plug these numbers in the FOIR formula, and you’ll get 15,000 / 60,000 = 0.25
Multiply 0.25 by 100, and your FOIR is 25%. This means that 25% of your gross monthly income is used to cover your fixed monthly debt obligations.
FOIR is an important indicator of your financial health and how lenders perceive your ability to manage debt. Here’s a breakdown of how your FOIR can be interpreted when you apply for loans:
FOIR < 40% indicates a healthy financial position with a manageable debt burden. Hence,
lenders generally perceive this as low risk, increasing the likelihood of your loan approvals.
FOIR > 50% means you have a substantial debt burden, perceived by lenders as a significant risk. Hence, high FOIR may lead to lower chances of loan approval or stricter lending terms.
FOIR between 40% and 50% is considered to be the ideal FOIR, acceptable to most lenders. As a general rule of thumb, FOIR is considered favourable when your fixed debt obligations are significantly lower than your income. This indicates a healthy repayment capacity and improves your creditworthiness.
FOIR calculations are pivotal for personal loan approvals as they offer a clear overview of an applicant’s financial health. Here’s why FOIR is so important when applying for personal loans:
Borrowers with a low FOIR are considered low-risk due to their higher repayment capacity. As a result, they may qualify for personal loans at more competitive interest rates, reducing the overall cost of borrowing.
Conversely, a high FOIR signals a greater debt burden. Such applicants are seen as higher-risk borrowers and may be offered loans at higher interest rates, if approved at all.
Please note that while FOIR is an important factor, the final interest rate will depend on several other factors, including the applicant’s age, income, credit score, and lender policies at the time of loan application.
A lower FOIR increases the chances of loan approval, whereas a higher FOIR may result in lower loan amounts or even loan rejection.
There are a few checks you can complete at your end itself for a successful personal loan application:
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 lowering your FOIR and getting a personal loan easily.
To support your financial goals, SMFG India Credit offers personal loans of up to INR 30 lakhs* at competitive interest rates and flexible tenures ranging from 12 to 60 months.
Before you apply for a personal loan online, make sure to have the following documents in place:
* Please note that this article is for your knowledge only. Loans are disbursed at the sole discretion of SMFG India Credit. Final approval, loan terms, disbursal process, foreclosure charges and foreclosure process will be subject to SMFG India Credit's policy at the time of loan application. If you wish to know more about our products and services, please contact us
Yes, improving your FOIR reflects better financial health and lowers your perceived risk as a borrower. A lower FOIR can enhance your chances of securing a personal loan at more competitive interest rates, provided you also meet other eligibility criteria.
Yes, FOIR plays a role in the assessment of most types of loans, such as personal loans and business loans. However, the acceptable FOIR threshold may vary depending on the lender and the type of loan product.
Yes, you can calculate FOIR on your own. Simply divide your total monthly financial obligations by your gross monthly income and multiply by 100. For example, if you pay loan EMIs or credit card bills worth INR 30,000 every month and your income is INR 1,00,000, your FOIR would be 30%.
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