What is FOIR and How is it Calculated for a Personal Loan?
When applying for a personal loan, lenders evaluate various factors to determine an applicant’s creditworthiness and repayment capacity. One essential aspect that significantly influences loan approval is the FOIR (Fixed Obligations to Income Ratio). FOIR is a crucial metric that helps lenders assess an individual’s ability to manage additional debt responsibly. This article aims to shed light on the concept of FOIR, its calculation, and its significance in the personal loan application process.
What is FOIR?
FOIR, also known as the Debt-to-Income Ratio (DTI), is a financial metric that measures the proportion of an individual’s fixed monthly obligations to their monthly income. Fixed obligations refer to recurring debt payments or financial commitments that remain consistent every month, such as existing loan EMIs, credit card bills, rent or mortgage payments, and other necessary expenses. By calculating FOIR, lenders can ascertain whether an applicant has sufficient disposable income to handle additional loan repayments.
How to Calculate FOIR?
Calculating FOIR involves a straightforward process:
Step 1: Determine Fixed Monthly Obligations
Identify and sum up all fixed monthly obligations, including:
- Existing loan EMIs (e.g., home loan, car loan)
- Credit card bills (consider the minimum payment due if the full amount is not paid)
- Rent or mortgage payments
- Other fixed expenses (e.g., insurance premiums, child support)
Step 2: Calculate Monthly Income
Calculate the total monthly income, which includes:
- Salary or wages (after deducting taxes and other mandatory deductions)
- Income from investments (e.g., dividends, rental income)
- Other regular sources of income
Step 3: Compute FOIR
Divide the total fixed monthly obligations (Step 1) by the total monthly income (Step 2), then multiply by 100 to get the FOIR as a percentage:
FOIR = (Total Fixed Monthly Obligations / Total Monthly Income) x 100
Understanding FOIR in Loan Approval
FOIR is a critical factor in the personal loan approval process for several reasons:
Risk Assessment: Lenders use FOIR to assess an applicant’s ability to manage debt and gauge the risk of potential default. A lower FOIR indicates better debt management and reduces the likelihood of loan default.
Loan Eligibility: Financial institutions often set a maximum FOIR limit that applicants must meet for loan approval. If an individual’s FOIR exceeds the lender’s acceptable range, their loan application may be rejected due to perceived higher risk.
Borrowing Capacity: FOIR directly impacts the maximum loan amount an individual can secure. A lower FOIR means a higher borrowing capacity, while a higher FOIR might limit the loan amount offered.
Financial Discipline: A strong FOIR reflects responsible financial management and increases the chances of obtaining better loan terms and interest rates.
Tips to Improve FOIR
If your FOIR is on the higher side, consider these steps to improve it:
Reduce Debt: Pay off existing loans or credit card balances to lower fixed monthly obligations.
Increase Income: Explore opportunities to boost your income through a side job, freelancing, or investments.
Avoid New Debt: Refrain from taking on additional debt until your FOIR is within an acceptable range.
Conclusion
FOIR is a crucial metric that lenders use to evaluate an applicant’s creditworthiness and repayment capacity for personal loans. By calculating FOIR, lenders can gauge an individual’s ability to manage debt responsibly. To enhance the likelihood of loan approval and secure better loan terms, individuals should aim to maintain a healthy FOIR by managing their fixed monthly obligations and increasing their disposable income. A strong FOIR not only improves the chances of loan approval but also reflects positively on one’s financial discipline and creditworthiness.