FOIR: Does It Affect Your Personal Loan Approval?

When applying for a personal loan, various factors influence the approval process. Among these, the Fixed Obligation to Income Ratio (FOIR) stands out as a critical parameter that lenders consider. Understanding FOIR and its impact on loan approval can significantly enhance your chances of securing a loan. This article delves into FOIR, its calculation, and how it affects personal loan applications.

FOIR, or Fixed Obligation to Income Ratio, is a key metric used by banks to assess an applicant's loan eligibility. It represents the proportion of an individual’s income that goes towards servicing existing debts, including Equated Monthly Instalments (EMIs). Essentially, FOIR is the debt-to-income ratio that gives lenders an insight into the borrower’s financial obligations and their ability to manage additional debt.

FOIR plays a pivotal role in determining whether a personal loan application is approved.

• Ideal FOIR Range: For most borrowers, an acceptable FOIR ranges between 40% and 55%. However, this ratio may be more flexible for high-net-worth individuals.
  
• Low FOIR: A lower FOIR indicates that the applicant has fewer financial obligations relative to their income. This suggests a higher disposable income, improving the likelihood of loan approval. Borrowers with a low FOIR are perceived as low-risk, making them more attractive to lenders.
  
• High FOIR: Conversely, a high FOIR signals that the borrower is already burdened with significant debt. This reduces their disposable income, lowering their creditworthiness and potentially leading to loan rejection. Lenders may view high-FOIR applicants as high-risk, making them less likely to approve the loan. 

FOIR calculation is straightforward and involves the following formula:

FOIR = (Sum of total debt/totally monthly income) x 100

• Total Monthly Debt: This includes all existing EMIs, credit card payments, rent, and living expenses.
• Gross Monthly Income: This is the total income before deductions like taxes.
   

Note: FOIR does not consider tax deductions, fixed deposits, or recurring deposits when calculating the total debt amount. 

To understand how FOIR impacts EMI repayment capacity, consider the following example:

• Applicant’s Monthly Income: Rs 60,000
• FOIR: 30%
• Existing EMIs: Rs 5,000 and Rs 4,000
   

With a FOIR of 30%, the applicant can allocate up to Rs 18,000 (30% of Rs 60,000) towards debt repayments. After accounting for existing EMIs totaling Rs 9,000, the applicant has Rs 21,000 in disposable income. Lenders will assess the borrower’s ability to repay a new loan based on this remaining disposable income. 

Reducing your FOIR can improve your chances of loan approval. Here are some strategies:

1. Apply for a Joint Loan: When you apply for a joint loan, the EMI burden is shared between the two applicants, lowering the individual FOIR.

2. Maintain a Healthy Credit History: Ensure timely payments and maintain a low credit utilisation ratio to strengthen your credit history, which can positively influence your FOIR.

3. Avoid Multiple Loans: Taking on multiple loans can negatively impact your FOIR, making you appear financially overextended. Avoid taking on additional debt before applying for a personal loan.

To apply for an HDFC Bank Personal Loan, click here.

*Terms and conditions apply. Personal Loan at the sole discretion of HDFC Bank Limited. Loan disbursal is subject to documentation and verification as per Banks requirement. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances.