Why Fixed Obligations to Income Ratio (FOIR) can affect your loan application

Banks or NBFCs generally focus on various aspects before approving a loan to a borrower.

Rohit Garg, Co-Founder & CEO, Smartcoin says, “There are three essential aspects or ratios when using the net income of an individual to gauge whether a potential candidate is eligible for receiving a loan – Fixed obligation to income ratio (FOIR), Loan-to-value ratio (LTV), Instalment income ratio (IIR).”

FOIR, the fixed obligation to income ratio is one of the most commonly used mainstream variables that financial entities like banks and loan-dispersal companies utilize to compute an applicant’s loan eligibility. Also known as the debt-to-income ratio, the FOIR also takes into consideration the EMI of the said potential loan.

How is FOIR calculated?

Experts say the Fixed obligation to income ratio is a foundational basis that lenders use to ascertain whether to process a loan application or not. To ensure the financial capability of a receiver to repay the loan, the FOIR is calculated by dividing the total debt by the loan applicant’s monthly salary.
FOIR = Total debt / monthly salary multiplied by 100

Garg says, “To corroborate an applicant’s financial status and FOIR, lenders are liable to undertake an in-depth analysis of their credit history, income sources, assets, and liabilities. Lending companies also delve deep into the slightest income details alongside checking the instalments of existing loans that the applicant is paying.”
He further adds, “After verifying the FOIR and credit history of the applicant, lending entities will even collect sundry details such as net income, savings history, annual tax, etc.”

The formula for calculating the FOIR of a person- FOIR = (Summation of All Existing Obligations/Net Monthly Salary) x 100
For Example, if your current salary is 15,000 and you have applied for a loan amount of 1lakh, the FOIR or the debt to income ratio using the aforementioned formula will be- 100000/15000 x 100 = 666.66

The Impact of FOIR on an applicant’s loan eligibility

The FOIR is used to determine whether to sanction a potential loan application. Experts say a reduced FOIR would imply that an applicant’s monthly financial obligations are considerably lower than their income. This naturally reflects healthy repayment ability on the part of the applicant. Therefore, the lower one’s FOIR, the higher the probability for quick loan approval as it means that the applicant’s debt obligations are less. A low FOIR directly amplifies the applicant’s net disposable income by furthering the repayment ability.

Here are some ways to reduce your FOIR and gain easy loan approvals:

● Apply for Joint loans
One can choose to apply for a personal loan alongside a co-applicant who could with one’s spouse, sibling, or parent. Garg says “Joint loan proves instrumental in increasing loan approval prospects as in such a case the EMI is conveniently divided between the two co-applicants.”

● Repay your loans on time
There is nothing like paying back one’s dues on time to preserve a healthy and desirable credit score. These dues or financial obligations could be anything ranging from EMIs, credit card payments, overdraft repayment, etc.

● Low credit utilization ratio
This is the ratio between an applicant’s credit amounts concerning the maximum credit that can be availed. Garg adds, “As a golden rule, it is prudent to maintain a low credit utilization ratio under the 30 per cent mark.” Note that if one’s Credit Utilization Ratio is observed to be constantly high, the chances of his/her loan application getting refused increases.

● Avoid multiple loans
Industry experts say, lenders, naturally, prefer lending to individuals who are adept at managing their finances. If an applicant has multiple loans to his/her name such as personal loan, home loan, car loan, etc, it can be seen as a sign of the applicant’s mismanagement of finances.

● Avoid frequent job changes
Lastly, if a prospective applicant has shifted multiple jobs over a relatively short course of time, they are liable to be seen in a negative light by the lenders. This decreases their chance of getting their loan approved.