Personal loans are unsecured loans without any restrictions on the use of money that has been borrowed. This is the reason why personal loans are immensely popular as a leading borrowing option to meet an array of financial requirements. Lenders are expected to follow stringent eligibility requirements to get approval for unsecured loans, like the instant personal loan, to understand the creditworthiness of the loan applicant.
The ability of the applicant to pay back the amount of instant personal loans is a major concern for lending institutions. The absence of proper precautions can lead to significant losses due to the increasing amount of poor debts and non-performing assets. Lenders can perform an in-depth background check on the applicant to minimize the risks associated with the approval of personal loan applications.
To assess the repayment capabilities of an applicant, lenders usually look into their credit history, score, monthly income, liabilities, assets, income sources, and FOIR. Let us understand what FOIR is in personal loans to help you make the most out of personal loans.
What is FOIR in Personal Loans?
FOIR stands for Fixed Obligations to Income Ratio, also known as debt-to-income ratio. It is one of the most crucial factors that financial institutions leverage to determine the applicant’s personal loan eligibility.
FOIR represents how much of the applicant’s income is spent on repaying credit obligations and existing debts. Lenders determine the FOIR to analyze whether or not the applicant will be capable of repaying the loan. The FOIR of the borrower affects several aspects, like eligibility, loan amount, personal loan interest rate, and others.
How is FOIR Calculated?
Here are some easy steps to calculate the FOIR of the borrowers:
1. Listing the Fixed Monthly Obligations
Note down all fixed payments you make every month. These can include monthly loan payments (like car loans, personal loans, and home loans), monthly rent, and other payments like dues on credit cards.
2. Checking the Monthly Income
Next, determine the total monthly income, which can include the salary or wages along with other forms of regular income, including income from some side business and rental income.
3. Calculating FOIR
Use the following formula:
FOIR = (Total Fixed Monthly Obligations/Total Monthly Income).
For instance, if your monthly income is INR 5000 and your total fixed monthly obligations are INR 2,000, the FOIR should be: (2000/5000) x 100 = 40. This implies that 40 percent of the monthly income is used to pay your fixed obligations.
What is the Importance of FOIR In Personal Loans?
Your eligibility for personal loans depends on the FOIR, implying that it can impact your access to financing. Typically, the FOIR requirements for any type of personal loan tend to range between 40% and 55%. This value can vary depending on the level of income and the lender.
The lower the FOIR is, the better the outcome. This is because it means that a borrower has minimal expenses, a higher disposable income, and a higher chance of paying the EMIs on time. Therefore, a lower FOIR improves your chances of approval.
Some more points highlighting the importance of FOIR for personal loans are:
1. Loan Approval: Lenders leverage FOIR to decide if they should approve the loan application. If you have a higher FOIR, it implies that you have less income left to pay off the loan amount. This tends to make lenders reluctant to offer you more credit.
2. Improved Financial Health: When you know your FOIR, it helps you analyze your financial health. A lower FOIR implies that you have a significant amount left even when you have paid off your monthly bills.
3. Debt Management: The more you are able to understand the FOIR, the better you are able to manage your debts.
What are Some Common Mistakes That Can Increase Your FOIR?
Some of the common mistakes that tend to increase the FOIR or debt-to-income ratio are:
1. Adding Too Much Debt
The FOIR helps lenders determine if you are able to afford a mortgage.
2. Credit Card Account Closure
If you end up decently closing a credit card account, the credit history will remain on the credit report for around ten years.
3. No Preparation Beforehand
Lack of proper preparation can make you commit mistakes in the process, leading to major losses.
Tips and Strategies to Improve Your FOIR
1. Increase Your Income: Start a freelance work or side business to generate some extra source of money. You can also think of relevant investment options that offer regular income, like dividends or some rental income.
2. Avoid New Debts: Waiting to apply for new loans until the FOIR becomes lower and easily manageable is recommended. You should aim to use credit cards less often to minimize your monthly expenses.
3. Refinancing Loans: You can refinance the loans to ensure lower interest rates. This helps reduce your monthly payments. An effective way is to improve the length of your personal loan to minimize monthly payments.
4. Pay Off Existing Debts: Make use of any extra money, like savings or bonuses, to pay off some parts of your personal loan. Group multiple debts into a single loan with a lower interest rate and reduced monthly payments.
Conclusion
FOIR is relevant for all types of loans. In the case of secured loans, the lenders are able to make up for the losses by taking over the collateral. Personal loan eligibility is significantly dependent on FOIR as it depicts the disposable income of the individual to repay both new debts.
Frequently Asked Questions:
1. Can You Get a Personal Loan with a High FOIR?
A higher FOIR reduces the borrower’s creditworthiness, and the loan application might be rejected.
2. How to Check FOIR Before Applying for a Personal Loan?
To check your FOIR, calculate your monthly debt obligations (including existing loan EMIs, credit card payments, etc.) and divide them by your monthly net income. A lower FOIR increases your chances of loan approval.
3. What is a good FOIR percentage for personal Loan approval?
The average FOIR for a credible borrower ranges between 40 percent and 55 percent and might vary for borrowers possessing a higher net worth.
4. Does FOIR calculation include all my debts and expenses?
Lenders analyze your total loan obligations for a given month, including existing EMIs and credit card payments.