What is FOIR

Before approving a personal loan application, banks and NBFCs ensure that the applicant has a sufficient repayment capacity to pay the EMIs by their due dates. For this, they use metrics like FOIR (Fixed Income to Obligation Ratio).

In this article, let us dive further into FOIR and learn how it impacts personal loan approval.

What is FOIR? How is FOIR Calculated?

FOIR refers to the proportion of one’s monthly income used for servicing his fixed monthly obligations. Lenders usually consider the EMI obligations, including the one of the proposed loan, for arriving at an applicant’s fixed monthly obligations. Many lenders also call this as EMI/NMI or EMI/GMI ratio depending on whether the applicant’s net monthly income or gross monthly income is considered for calculating this ratio.

For example, if your current salary is 50,000 and you have existing fixed monthly obligations of Rs 20,000 (including the EMI of the proposed personal loan of Rs 1 lakh), then the applicant’s FOIR will be 40% (20,000/ 50,000 x 100).

However, some lenders factor in the applicants’ monthly living expenses like rent, insurance premiums along with their EMI to arrive at the fixed monthly obligations.

Continuing with the aforementioned example, if the applicant’s monthly living expenses amounting to Rs 15,000 are also factored in, then the applicant’s FOIR will increase to 70%.

How FOIR affects personal loan eligibility?

Lenders usually require their personal loan applicants to have FOIR or EMI/NMI ratio of less than 50% – 55%. Hence, those exceeding FOIR or EMI/NMI ratio of 50%-55% have lower chances of personal loan approval. Note that some lenders may set higher FOIR for those having higher income.

Click to know other factors determining personal loan eligibility.

How to reduce FOIR?

Individuals with higher FOIR can improve their loan approval chances by practising the following tips:

• Increase your loan tenure: Applicants with higher FOIR can improve their FOIR by increasing their loan tenure. Extending your loan repayment period will reduce your EMI obligations and thereby, improve your FOIR.
• Add a co-applicant: The lender will also consider the income of the co-applicant while evaluating repayment capacity. Hence, adding an earning family member as a co-applicant would help in reducing FOIR.