What is FOIR

Posted in Lending Articles By Sajhyadri Chattopadhyay-
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Fixed Obligation to Income Ratio (FOIR) is a crucial financial tool used to assess a borrower's repayment capacity. It represents the proportion of an individual's fixed obligations —such as credit card payments, existing loan EMIs, and other fixed monthly commitments— to their gross monthly income. FOIR is a crucial risk assessment tool for banks and NBFCs when considering loan applications. Hence, it promotes responsible lending practices in India. 

How Does FOIR Affect Personal Loan Approval

FOIR helps lenders evaluate whether a borrower can manage additional loan repayments without exceeding a sustainable limit of debt burden. A lower FOIR indicates a healthier financial position, increasing the likelihood of loan approval, as it suggests the borrower has ample income after meeting existing obligations. 

Conversely, a high FOIR may raise concerns about the borrower's capacity to handle more debt. Maintaining a balanced FOIR by managing existing obligations wisely enhances the chances of personal loan approval, promoting a sustainable and responsible borrowing pattern aligned with the borrower's income. 

How to Calculate FOIR

FOIR is calculated by dividing the total fixed obligations of an individual by their gross monthly income and then multiplying by 100 to express the result as a percentage. The formula is: 

FOIR = Total Fixed Obligations / Gross Monthly Income x 100

  • Fixed obligations include existing loan EMIs, credit card payments, and other monthly commitments.

  • Gross monthly income represents the total income before deducting taxes or other deductions. 

How Can You Reduce FOIR to Improve Your Chances of Loan Approval

To reduce FOIR and boost the odds of loan approval in your favour, consider the following strategies – 

1. Repay Existing Debts: 

Focus on clearing outstanding debts, especially high-interest loans or credit card balances. This lowers your fixed obligations, positively impacting FOIR. 

2. Consolidate Loans: 

Explore options to consolidate multiple loans into a single, more manageable debt with lower interest rates. This can streamline repayments and reduce monthly obligations. 

3. Increase Income: 

Seek opportunities to boost your income, such as a salary raise, freelance work, or a part-time job. A higher income directly lowers FOIR, making you more favourable to lenders. 

4. Avoid New Debt: 

Temporarily refrain from taking on new debts, such as additional loans or credit cards, to prevent an increase in fixed obligations. 

5. Negotiate Loan Terms: 

Engage with lenders to negotiate more favourable terms, such as extended loan tenures or reduced interest rates. This can lower your monthly payments. 

6. Downsize Expenses: 

Review and cut down on non-essential expenses to free up more income for debt repayment. A leaner budget contributes to a lower FOIR. Try using an EMI Calculator like the one available on Bajaj Markets to have a better idea of your monthly obligations and how much you need to budget your expenses.  

7. Prepay or Close Loans: 

If feasible, consider prepaying a portion of existing loans or closing smaller loans entirely. This reduces both principal and interest components, impacting FOIR positively. 

8. Improve Credit Score: 

A higher credit score may allow you to negotiate better loan terms. Timely payments and responsible credit behaviour contribute to a positive credit history. 

Do All Lenders Have the Same FOIR Criteria

Different banks and Non-banking Financial Institutions have varying criteria when it comes to Fixed Obligation to Income Ratio. The specific FOIR limit can differ based on the lending institution's policies, risk appetite, and prevailing economic conditions. Banks typically set their FOIR criteria based on internal risk assessments and regulatory guidelines. 

Borrowers need to be aware of the FOIR requirements of the specific bank they are dealing with when applying for loans, as this can influence the approval or rejection of the loan application. Browse online on financial marketplaces such as Bajaj Markets to find a lender that will offer you the best loan terms concerning your income and liabilities. 

Does FOIR Vary across Different Loan Types

FOIR can vary across different loan types and lending institutions. Different types of loans, such as personal loans, home loans, and car loans, may have distinct FOIR criteria. This is often influenced by factors like the purpose of the loan, the associated risk, and the repayment terms. Lending institutions set FOIR criteria based on their risk assessment and the specific characteristics of each loan category. 

For example, secured loans like home loans and gold loans might have a slightly higher FOIR threshold than unsecured personal loans. Try to understand the FOIR requirements associated with the type of loan you are seeking, as this can impact the approval or rejection of your loan application. Always check with the specific lending institution for their FOIR criteria relevant to the type of loan you are applying for. 

 

One might say that Fixed Obligation to Income Ratio has significant power to call the shots when it comes to loan approval. Moreover, strategic debt management and a balanced FOIR are essential to secure favourable loan terms. Remember, a bird's eye view of multiple lenders can help you make a better judgement call when choosing a personal loan. With Bajaj Markets, you can find exactly that! Compare interest rates and loan tenures of various top lenders and choose the funding option that best suits your monthly obligations. 

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