When a borrower applies for a personal loan, the lender’s initial step is to determine the borrower’s eligibility. All financial institutions assess a borrower’s ability to repay a personal loan by looking at their credit score, monthly income, employment history, and outstanding debts.
Fixed Obligations to Income Ratio, or FOIR, is one of the factors considered by most lenders. Let’s examine what FOIR is and how it is determined when a personal loan is applied for.
What is FOIR?
In plain English, FOIR is the amount of fixed monthly cash outlays as a proportion of monthly income. The outcome is your monthly disposable income, which lenders use to assess your capacity for repayment.
Due to the fact that personal loans are unsecured, lenders are cautious while examining your credit history and profile. Therefore, when a candidate submits an application for a Personal Loan, the chance of default is increased. As a result, FOIR is crucial in establishing your eligibility for a Personal Loan. The debt-to-income ratio, or FOIR, compares monthly income with EMIs that are due each month.
How Is a Personal Loan’s FOIR Calculated?
The formula for calculating FOIR is as follows:
Total Fixed Monthly Obligations/Net Monthly Salary multiplied by 100 equals the fixed obligation to income ratio.
To further understand how the FOIR formula is calculated, consider the following example:
Mr X requests an Rs. 10 lakh personal loan with a 5-year term. His fixed monthly obligations are as follows, and his net monthly income is one lakh rupees:
5,000 rupees towards a loan for used cars
21,500 rupees for a mortgage
Mr X determined his monthly EMI for the required loan amount to be Rs. 21,742 after utilising the personal loan EMI calculator.
(5,000 + 21,500 + 21,742)/ 1,00,000 x 100 = 48.24% FOIR
Your monthly obligations shouldn’t equal more than 50% of your net monthly income, which is the ideal range for your FOIR, which is between 40% and 50%. Lenders also take FOIR into account for borrowers with higher net income, which can reach 60% or 70%.
What Are Some Methods for FOIR Reduction?
You can lower your FOIR in a few different ways to improve your chances of getting a personal loan.
Avoid taking multiple loans
Lenders are more likely to lend money to people they believe to be trustworthy. Lenders may assume you are leveraged if you have many loans (such as a mortgage, vehicle loan, or business loan) and may also assume you have poor money management skills.
If there are numerous loans in operation, it may be wise to combine them into a single loan with an instalment that is lower than the sum of the payments for all the loans that are being combined.
Submit a joint application
You might think about submitting a co-income applicant when applying for some loans, such as a mortgage. For example, the co-applicant could be a spouse, parent, or another member of the family. Although only a portion of the EMI for the home loan will be regarded as your obligation, this will lower your FOIR.
Strive for modest card credit utilisation
The difference between how much credit you use and how much credit you have available is known as the credit usage ratio. For example, your chances of being approved for a personal loan will increase if your credit card use rate is under 30%.
Wrapping It Up
Because a personal loan is unsecured, lenders will primarily consider your credit history and ability to repay when deciding whether to approve your loan application. Personal loans from PaySense with low-interest rates. Thanks to their short online personal loan application process and low documentation requirements, you will receive your funds smoothly and without any fuss. Your monthly EMIs can be calculated using their personal loan EMI calculator. The user-friendly tool is available on their website. To calculate your monthly EMIs, simply input the loan amount, interest rate, and preferred tenure.
This will make it simpler for you to manage your monthly payments and expenses. Consider reassessing your FOIR if you want to apply for a personal loan so you can budget your monthly payments without stressing the budget.