Why the Fixed Bond-to-Income Ratio (FOIR) Can Affect Your Loan Application


FOIR is one of the common variables most commonly used by financial entities such as banks and loan distribution companies to calculate an applicant’s loan eligibility.

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

Rohit Garg, co-founder and CEO of Smartcoin, said, “There are three critical aspects or ratios when using an individual’s net income to assess whether a potential candidate is eligible to receive a loan – Fixed Obligation Ratio Income Ratio (FOIR), Loan-to-Value Ratio (LTV), Laddered Income Ratio (IIR).”

FOIR, Fixed Obligation to Income Ratio is one of the common variables most commonly used by financial entities such as banks and loan distribution companies to calculate an applicant’s loan eligibility. Also known as the debt ratio, the FOIR also takes into consideration the EMI of said potential loan.

How is the FOIR calculated?

Experts say the fixed obligation-to-income ratio is a fundamental basis that lenders use to determine whether to proceed with a loan application or not. To guarantee a beneficiary’s financial capacity to repay the loan, the FOIR is calculated by dividing the total debt by the monthly salary of the loan applicant.
FOIR = Total debt / monthly salary multiplied by 100

Garg says, “To substantiate an applicant’s financial situation and the FOIR, lenders are likely to undertake a thorough analysis of their credit history, sources of income, assets and liabilities. Loan companies also dig into the finer details of income while verifying the installments of existing loans that the applicant is paying.
He further adds, “After checking the applicant’s FOIR and credit history, lending entities will even collect various details such as net income, savings history, annual tax, etc.”

The formula for calculating a person’s FOIR – FOIR = (Sum 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 1 lakh, the FOIR or debt to income ratio using the above formula will be 100,000/15,000 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 request. Experts say a reduced FOIR would mean that an applicant’s monthly financial obligations are significantly lower than their income. This naturally reflects sound repayment capacity on the part of the applicant. Therefore, the lower the FOIR, the higher the likelihood of quick loan approval, as it means the applicant’s debts are lower. A low FOIR directly amplifies the applicant’s net disposable income by strengthening their ability to repay.

Here are some ways to lower your FOIR and get loan approvals easily:

● Apply for joint loans
One can choose to apply for a personal loan alongside a co-applicant who could do so with their spouse, brother or parents. Garg states that “Joint lending proves instrumental in increasing loan approval prospects, as in such a case the EMI is conveniently split between the two co-applicants.”

● Repay your loans on time
There’s nothing like paying back your dues on time to maintain a healthy and desirable credit rating. These dues or financial obligations can be anything from EMIs, credit card payments, overdraft repayment, and more.

● Low credit utilization rate
This is the ratio of an applicant’s credit amounts to the maximum credit that can be used. Garg adds, “As a rule of thumb, it’s prudent to keep credit utilization low below 30%. Note that if one observes that the credit utilization ratio is constantly high, the chances that his loan application will be refused increase.

● Avoid multiple loans
According to industry experts, lenders naturally prefer to lend to people who know how to manage their finances. If an applicant has multiple loans in their name, such as a personal loan, home loan, car loan, etc., this can be seen as a sign of mismanagement of the applicant’s finances.

● Avoid frequent job changes
Finally, if a potential candidate has changed several jobs over a relatively short period of time, they are likely to be viewed in a negative light by lenders. This decreases their chances of getting their loan approved.

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