As per the Reserve Bank of India report, the number of NPAs of financial institutions is forecasted to rise to 13.5% by September 2021. This will understandably lead most lenders to impose strict eligibility standards against the availability of funds. To mitigate this situation, borrowers will need to strengthen their eligibility, and maintaining low Fixed Obligations to Income Ratio or FOIR is one of them.
Based on this parameter, the credit score is also calculated. Hence, intending borrowers need to know the nitty-gritty of FOIR calculation before applying for funds like a personal loan. After understanding this factor, individuals can assess their repayment capacity and adopt the means to improve it.
FOIR- A brief introduction
FOIR is used to calculate the percentage of net income that goes towards paying fixed monthly liabilities. Since it reflects the disposable income of an individual, lenders can assess the repayment capacity from this component.
Also known as debt-to-income ratio, FOIR calculation also includes the EMI outgo of the loan applied for. Although the FOIR requirement varies with financial products, most lenders ask for a FOIR between 40% and 50% of net income while one applies for a personal loan.
Besides understanding the basic concept of FOIR, individuals also need to know its calculation process with befitting examples.
How is FOIR calculated?
Following are some of the common liabilities that are included during FOIR calculation.
- EMI towards an existing loan, if any
- Credit card bills
- House rent
- Recurring lifestyle expenditure
- Estimated EMI of the loan applied for
However, there are also several exemptions, like taxes, payment towards RD or/and FD, etc., in place. Since it is part of the verification process of a personal loan, borrowers need to know how to calculate FOIR using the formula mentioned below.
FOIR= (Sum of liabilities/monthly income) X 100
For instance, if you have total monthly liabilities of Rs.35,000 and your monthly income is Rs.75,000. In that case, your FOIR would be = (35,000/75,000) X 100 = 46.66%.
In such cases, lenders will likely approve the fund requested. However, to be more assured of approval, you will need to find ways to improve FOIR. Otherwise, it will affect the loan approval.
Effects of FOIR on a personal loan
In most cases, generally, lenders reject a loan application if the FOIR of an applicant is above 50%. It is one of the leading reasons for personal loan rejection. This factor, to some extent, indicates the low repayment capacity of the borrowers. Consequently, lenders deem applicants as high-risk borrowers.
On the other hand, low FOIR indicates the following –
- Substantial disposable income
- Lesser obligations
- Better repayment capacity.
- Higher chance of timely repayment.
After making the FOIR calculation, if you find that it is higher than the permissible value, you can lower it by following some simple tips.
Tips to lower FOIR
First, try to clear existing debts if you are servicing multiple debts at a time. In this case, you can also opt for a debt consolidation loan with the help of a personal loan.
Select financial institutions like Bajaj Finserv offer this fund against a competitive interest rate.
They also provide pre-approved offers that simplify and expedite the loan application process. Apart from personal loans, these offers also apply to several other financial products like business loans, credit cards and many more. You can check your pre-approved offer by entering your name and contact number online.
You can also opt for prepayment to clear the debts faster. Some benefits of loan prepayment include lower EMI and reduced interest payable.
Hence, FOIR calculation is exceedingly important for both borrowers and non-borrowers. It provides clear breakups of the monthly liabilities against the net income, facilitating improved financial planning.