Understanding the financial obligation-to-income ratio (FOIR) is essential for a safe and secure personal loan. Lenders prioritise FOIR as the key criterion for assessing loan eligibility. Simply put, FOIR is a critical metric used by lenders to evaluate an individual's ability to manage their debt responsibly and ensure timely repayment.
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It represents the percentage of borrowers’ monthly income dedicated to handling existing financial commitments.
Why does FOIR matter?
Knowing the FOIR is crucial in getting approval for the loan process.
“It provides a window to the lender to oversee the financial capacity, and whether or not you can take additional debt,” said spokesperson of Rufilo, an online personal loan app.
How to calculate FOIR for any personal loan (as mentioned by spokesperson of Rufilo)?
For calculating the FOIR, you need to check for your existing financial commitments and your monthly income.
FOIR can be calculated through this formula:
FOIR = (total monthly obligations/monthly income)*100
For example, if your total monthly obligations (include present loans, credit card payments, etc.) amount to ₹30,000 and your monthly income is ₹1,00,000, then your FOIR would be:
FOIR = (30,000/1,00,000)*100= 30
Interpreting your FOIR
Low FOIR (Less than 30%): Specifies a healthy financial situation.
“That will let you have enough disposable income to take on additional debt,” said the spokesperson.
Moderate FOIR (30-50%): Commends a feasible balance between income and obligations.
High FOIR (Above 50%): This might lead to some concerns for the lenders, as it shows that most of your income is committed to existing obligations. This will be seen as affecting your ability to repay a new loan.
Strategies to improve your FOIR
According to spokesperson of Rufilo, if your FOIR is on the large scale, then here are few of the strategies that can improve it:
Reduce existing debt: Clear your present debts or consolidate them to reduce your FOIR.
Increase income: Look for additional sources of income or enhance your primary income flow so that it can boost your FOIR.
Minimise unnecessary expenses: Cut down on unnecessary expenses to clear up more income for debt repayment.
