FOIR is one of the essential parameters that lending institutions consider while determining an individual’s eligibility for a personal loan. FOIR or fixed obligation to income ratio is the measure of the percentage of an individual’s income that goes towards paying current fixed obligations such as rent, EMIs, electricity bills, etc.
However, all types of statutory deductions such as insurance premium, taxes, nationalised scheme investments, etc. are not taken into consideration by the lending institution while calculating FOIR.
Lenders use FOIR to gain an idea of an individual’s repayment capability and determine the credit risk carried by them. Therefore, an individual should know what is FOIR along with its calculation before applying for a personal loan.
How is FOIR calculating?
FOIR or fixed obligation to income ratio can be calculated by dividing the sum of all obligations of an individual by the total income amount on a monthly basis. The formula for FOIR calculation is as follows –
FOIR = [Sum of all obligations/ total income in a month] *100
The understanding of what is FOIR can further be better grasped with the help of the following examples –
An individual has an income of Rs.35,000 per month. He/she is paying a home loan EMI of Rs.10,000 and an EMI of Rs.7,000 on the car loan. Therefore, the total fixed liabilities are Rs.17,000 and the FOIR will be [17,000/35,000] * 100 = 48.57%.
Another individual has an income of Rs.50,000 per month. He/she is also paying rent of Rs.10,000 and an EMI of Rs.7,000 on car loan. Thus, his/her total monthly obligations equal Rs.17,000. Therefore, the FOIR here will be [17,000/50,000] *100 = 34%.
In these two situations, the second individual stands an improved chance of receiving approval if he/she applies for a personal loan as against the first individual as the FOIR in that case is near 30%, which is often the ideal requirement.
It is primarily because when an individual has high fixed obligations, the repayment capability reduces. They are therefore considering carrying a higher risk to lenders.
Maintaining the FOIR at an optimum level also allows you to implement the ways to manage your debt efficiently.
Contrarily, lenders consider individuals with a low FOIR to be of low risk and their loan application gets sanctioning quickly. With this understanding of what is FOIR, also take a look at other essential eligibility parameters.
Other factors that impact loan eligibility
Prospective applicants should ideally calculate their FOIR before applying for a personal loan or any such financing option to reducing the chances of getting rejecting.
Besides FOIR, credit score is also one of the critical factors that leave a significant impact on an individual’s personal loan eligibility fulfilment. It is because the credit score is a numerical summarisation of an applicant’s credit history which contains information such as past and current loans, repayment history, etc.
Thus, if an individual carries a low credit score, it suggests that he or she has defaulted on dues or make late payments in the past which is considering to be of high risk by a lending institution. Accordingly, his/her eligibility for a loan will be determining.
Apart from credit score, an individual’s age, income, and work experience also crucially impact his/her eligibility for a personal loan. Meeting all the eligibility requirements is also one of the best tips to take out personal loans conveniently.
One should also note that borrowing options like Bajaj Finserv Personal Loan come with minimal eligibility requirements.
The concerned lending institution also extends pre-approved offers to applicants for a hassle-free and quick application procedure. Such offers can be available on an array of credit products such as personal loans, business loans, credit cards, etc. One can easily check his/her pre-approved offer by entering their name and contact information.
Apart from knowing what is FOIR, borrowers should make sure to go through the eligibility parameters as specified by the respective lending institution before applying for a personal loan.