Understanding the Fixed Obligation to Income Ratio (FOIR) is important when applying for a personal loan. It indicates a strong financial standing and can speed up the loan approval process. Banks consider multiple factors to ensure the borrower’s repayment capacity, and FOIR is one of them. FOIR is a parameter that determines loan approval and interest rates. This article will cover various aspects of FOIR, including its role, calculation, and impact on real estate investments.
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What is FOIR?
The Fixed Obligation to Income Ratio (FOIR) is a financial metric that lenders use to assess a borrower’s creditworthiness. FOIR is calculated by dividing the borrower’s fixed obligations, such as monthly loan repayments, by their monthly income. This ratio is expressed as a percentage, with a lower FOIR indicating a lower risk for the lender. On average, a credible borrower has a FOIR between 40 and 55 per cent, which may vary for high-net-worth individuals.
FOIR is crucial in evaluating a borrower’s ability to take on additional financial obligations while managing their debts. Lenders have a maximum FOIR limit that borrowers must meet to qualify for a loan. For example, if the FOIR limit is 50 per cent, it means that the borrower’s total fixed obligations should not exceed 50 per cent of their monthly income.
A borrower’s FOIR ratio can significantly impact their chances of loan approval. Lenders prefer borrowers with a lower FOIR ratio as it suggests a higher disposable income and a lower risk of loan default. Therefore, maintaining a healthy FOIR ratio is crucial for borrowers seeking to increase their loan approval chances. This can be achieved by effectively managing existing debts and keeping fixed obligations to a minimum.
How to calculate FOIR?
To calculate FOIR, follow these simple steps. First, add all your monthly debts, such as credit card bills, existing EMIs, living expenses, and rent. Remember not to include tax deductions or contributions to recurring and fixed deposits. Next, divide the total monthly debt by your total monthly income, then multiply the result by 100 to get a percentage.
FOIR = (Total monthly debt/total monthly income) x 100
How to reduce the FOIR percentage?
- Consider applying for a joint loan with a co-applicant to increase your chances of loan approval.
- Prioritise paying off your current debts to reduce your FOIR and become more eligible for new loans.
- Increase your income by taking on a part-time job or freelancing to make it easier to pay off debts and meet financial obligations.
- Review your monthly expenses and reduce discretionary spending to free up more funds to pay off debts and improve your FOIR.
- Negotiate with your lenders to restructure your loan or offer better repayment terms if you are struggling with high-interest rates or unmanageable EMIs.
- Consider debt consolidation to combine multiple debts into a single loan with a lower interest rate, but carefully review the terms and conditions before deciding.
How does FOIR impact real estate investments?
Real estate investments are a popular option for people who want to increase their wealth. But before investing, it is important to consider various factors. One of the most crucial things to think about is your FOIR. A low FOIR is beneficial for real estate investments in many ways. Firstly, it increases the likelihood of getting loan approval, as lenders see lower risk. A low FOIR also allows you to borrow more money, which means you can invest in higher-value properties.
A low FOIR is also important because it ensures you have enough money to cover other expenses and maintain your lifestyle. Real estate investments often require additional costs such as maintenance, property taxes, and insurance.
If you plan to apply for a loan, it is a good idea to calculate your FOIR ratio beforehand using the above formula. After that, talk to your financial advisor and a suitable lender to figure out the best loan terms for your financial situation.
FAQs
What is FOIR?
FOIR stands for Fixed Obligation to Income Ratio. It is a financial metric that lenders use to assess a borrower's creditworthiness.
How is FOIR calculated?
FOIR is calculated by dividing the borrower's fixed obligations, such as monthly loan repayments, by their monthly income. This ratio is expressed as a percentage.
What is a good FOIR ratio for a credible borrower?
On average, a credible borrower has a FOIR between 40 and 55 per cent, but this may vary for high-net-worth individuals.
How can borrowers reduce their FOIR percentage?
Borrowers can reduce their FOIR percentage by paying off their existing debts, increasing their income, cutting back on discretionary spending, negotiating with lenders, and consolidating multiple debts into a single loan with a lower interest rate.
Why is FOIR important when applying for a personal loan?
FOIR is important when applying for a personal loan because it indicates a strong financial standing and can speed up the loan approval process. Banks consider multiple factors to ensure the borrower's repayment capacity, and FOIR is one of them. FOIR is a parameter that determines loan approval and interest rates.
What factors do lenders consider to ensure a borrower's repayment capacity?
Lenders consider multiple factors to ensure a borrower's repayment capacity, including their credit score, income, employment history, debt-to-income ratio, and FOIR.
How to maintain a healthy FOIR ratio?
Borrowers can maintain a healthy FOIR ratio by managing their existing debts effectively, keeping fixed obligations to a minimum, and increasing their income. They can also prioritise paying off their current debts, negotiate with lenders to restructure their loans, and consider debt consolidation.
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