Here are some ways to lower your FOIR and get easy loan approvals:
Banks or NBFC generally focus on several aspects before approving a loan to a borrower.
Rohit Garg, Co-founder and CEO of Smartcoin says: “There are three essential aspects or proportions when using a person’s net income to assess whether a potential candidate is eligible to receive a loan – Fixed Obligation to Income Ratio (FOIR), Loan-to-value ratio (LTV), Income to installment ratio (IIR) «.
FOIR, the ratio of fixed obligation to income is one of the most commonly used primary variables that financial institutions such as banks and loan distribution companies use to calculate an applicant’s loan eligibility. Also known as the debt-to-income ratio, the FOIR also takes into account the EMI of that potential loan.
How is FOIR calculated?
Experts say that the fixed obligation-to-income ratio is a critical basis that lenders use to determine whether or not to process a loan application. To ensure a beneficiary’s financial ability 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
Says Garg: “To corroborate an applicant’s financial status and FOIR, lenders are required to conduct an in-depth analysis of their credit history, sources of income, assets and liabilities. The loan companies also delve into the smallest details of income along with verifying the installments of the existing loans that the applicant is paying.
It further adds: “After verifying the FOIR and credit history of the applicant, lenders will even collect various details such as net income, savings history, annual taxes, etc.”
The formula to calculate 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- 100,000/15000 x 100 = 666.66
The impact of FOIR on an applicant’s loan eligibility
The FOIR is used to determine if a potential loan application is sanctioned. Experts say that a reduced FOIR would imply that an applicant’s monthly financial obligations are considerably lower than their income. This naturally reflects a healthy repayment capacity on the part of the applicant. Therefore, the lower the FOIR, the greater the likelihood that the loan will be approved quickly, as it means that the applicant’s debt obligations are lower. A low FOIR directly amplifies the applicant’s net disposable income by promoting repayment ability.
Here are some ways to lower your FOIR and get easy loan approvals:
● Apply for joint loans
One can choose to apply for a personal loan together with a co-applicant who could do so with their spouse, brother or father. Garg says that “the joint loan is essential to increase the prospects of loan approval, since in such a case, the EMI is conveniently divided between the two co-applicants.”
● Pay your loans on time
There is nothing like paying your installments back on time to preserve a healthy and desirable credit score. These fees or financial obligations can be from EMI, credit card payments, overdraft reimbursement, etc.
● Low credit utilization rate
This is the relationship between an applicant’s credit amounts in relation to the maximum credit that can be taken advantage of. Garg adds, “As a rule of thumb, it is prudent to keep a low credit utilization ratio below 30 percent.” Keep in mind that if a person’s credit utilization rate is observed to be consistently high, the chances that their loan application will be rejected increases.
● Avoid multiple loans
Industry experts say that lenders naturally prefer to make loans to people who are adept at managing their finances. If an applicant has multiple loans in their name, such as a personal loan, a home loan, a car loan, etc., it can be seen as a sign of poor management of the applicant’s finances.
● Avoid frequent job changes
Lastly, if a prospective applicant has changed jobs in a relatively short period of time, lenders are likely to view them in a negative light. This reduces the chances that your loan will be approved.
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