What is FOIR and how does it impact your personal loan approval?

Have you heard anything about FOIR (Fixed obligation to income ratio)? If you haven’t, it is better to understand it as it plays a crucial role in getting your personal loan. Simply put, FOIR is nothing but the debt-to-income ratio of an individual.

FOIR is determined by a formula that aggregates the total monthly debt of the potential borrower that includes existing EMIs (Equated Monthly Instalments) on loans, credit card bills and other debt, which is divided by the total monthly income.

A lower FOIR will either result in you getting a significantly lesser personal loan amount or no loan at all. Here are some details that you have to keep in mind about FOIR to get the personal loan amount that you need.

The impact of FOIR on loan approval

FOIR is a numerical representation that shows how much debt you owe in relation to your income. It serves as a guide to banks and financial institutions in processing your loan. Understanding how FOIR works in personal loan approvals is crucial for potential borrowers. 

Typically, an average FOIR falls in the 40%-55% category. At average FOIR levels, 40%-55% of your income goes into servicing debt and regular obligations, which allows sufficient room for managing your regular expenses.

A lower FOIR substantially increases the chances of getting your personal loan approved. “A lower FOIR indicates that the applicant has a relatively smaller financial obligation compared to monthly income. This implies a substantial disposable income, enhancing the borrower’s capacity to repay the loan EMI. In such cases, the likelihood of loan approval is higher,” according to ICICI Bank.

Consequently, a higher FOIR shows that the individual has significant debt that limits the disposable income in her/his hands substantially. This is a clear red flag for lenders. Persons with higher FOIR are less likely to get approvals for loans. “A higher FOIR lowers the creditworthiness of the borrower, and the loan application may be rejected,” according to HDFC Bank.

How is FOIR calculated?

The calculation of FOIR is actually quite simple. It aggregates the monthly obligations of an individual, which includes EMI payments, credit card bills, living expenses and other expenditures. This sum is then divided by the gross total monthly income of the individual and multiplied by 100.

FOIR= Sum of total monthly obligations/Gross total monthly income x 100. 

FOIR calculations, however, do not include tax deductions, investments in fixed and recurring deposits. If the individual is earning ₹90000 per month and her/his FOIR is 30%, it means that she/he spends ₹27000 to meet financial obligations every month.

This leaves the person with a gross income of ₹63000 every month. Banks and financial institutions consider individuals with such high income compared to their monthly obligations as ideal candidates for providing loans.

How can you reduce FOIR?

Banks and financial institutions provide multiple strategies to reduce FOIR. Here are some ways to lower your FOIR and enhance the chances of getting your personal loan approved.

Apply for a joint loan: You can apply for a joint loan as it will allow you to share the EMI burden. This will also significantly reduce individual FOIR and improve the likelihood of getting your loan approved.

Maintain a good credit history: A good credit history is absolutely essential for obtaining a loan. Irrespective of how high your FOIR or debt burden is, you have to pay your EMIs and credit card bills on time. This way you can ensure that your credit score is not affected. A good credit score greatly improves your loan eligibility.

Reduce multiple loans: One of the main reasons for a high FOIR is your enhanced debt levels. This can be due to servicing multiple loans at the same time. Having too many loans is not a good idea anyway as it will severely impact your credit score and ability to borrow. Individuals with multiple loans should reduce them by paying off non-priority borrowings at the earliest. These include BNPL (Buy now, pay later) loans and products bought using zero interest EMIs.

Enhance income streams: Having multiple income streams is a good way to increase your FOIR. But it is easier said than done, especially for salaried individuals. You can invest any surplus that you have in assets that offer stable returns. You can also focus on avenues where your skills will fetch you an additional income.

Allirajan M is a journalist with over two decades of experience. He has worked with several leading media organisations in the country and has been writing on mutual funds for nearly 16 years.