It is very important to have an understanding of your financial and loan approval procedure if you are planning to borrow money. There are several factors, of which the major factor that holds a pivotal role is the FOIR (Fixed Obligation to Income Ratio).
This stands out as a pivotal metric that allows lenders to evaluate creditworthiness. Understanding FOIR and its importance can be very crucial and helps lenders navigate their loan procedure.
FOIR (full form Fixed Obligation to Income Ratio), is a well-known financial term, which lenders use to evaluate the capability of the lender, as to whether the borrower will be able to pay the loan or not.
It represents the proportion of an individual's fixed obligations, such as loan EMIs (Equated Monthly Instalments) and other fixed expenses of the individual, which will be aligned with the income.
To calculate FOIR, one should add up all the obligations, fixed in a month and then divide it by the monthly fixed EMIs, to ensure the returning capacity.
Lenders typically use FOIR as a measure to assess whether a borrower will be able to handle the excess payment without hampering their current financial condition.
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The impact of FOIR on personal loan approval
Understanding how FOIR impacts personal loan approval is needed, especially when you are planning to take one such loan. Let us look at how FOIR affects your overall process and how it works.
Assessment of loan eligibility
Lenders utilise FOIR to ensure the qualification of the borrower if they are capable of taking a loan or not. A lower FOIR signals to lenders that a major portion of the borrower's money goes into debt repayment and it enhances their chances of getting their loan approved.
Risk Management:
A higher FOIR indicates that a huge part of the borrower's income is dedicated to financial commitments, which means the lenders will know the repayment financial condition. In such cases, most lenders avoid approving loans to them, as it may be a risk to them.
Determining Loan Amount:
FOIR plays a crucial role in determining the maximum loan amount a borrower can receive. Lenders leverage FOIR to calculate the highest Equated Monthly Instalment (EMI) which they can pay considering their fixed monthly income. This calculation is a factor to decide on the amount which the borrower will get based on the calculations.
Comprehending the implications of FOIR is important as it directly indicates the loan process of an individual, with spreading insight on risk, EMI calculations, eligibility and stability, for lenders.
Your eligibility for a Personal Loan is directly impacted by your Fixed Obligation to Income Ratio (FOIR). Lenders usually prefer to see a FOIR ranging from 40% to 50%. If the FOIR percentage is higher it gets difficult to secure a loan. However, in cases, you get a loan there will be a possibility that you will get a higher interest rate. Therefore, it is very important to maintain a decent FOIR profile, which will help you to get loan approval in an easy form, without having much impact on your finances.
Moreover, your FOIR can directly impact the interest rates which have been offered on the given loan. Lenders view a high FOIR as risk, which often results in a high interest, as they want to reduce their risk of approving a loan to you. Meanwhile, with a lower FOIR, it is easy to get a loan and will be an advantage, qualifying you for the loan with a low-interest rate. Now, this is the situation when a personal loan EMI calculator is helpful.
A Personal Loan EMI Calculator is a valuable resource for borrowers, which gives insight in their monthly repayment obligations and their influence on their FOIR. With this tool, you get an insight about your monthly EMI, by the input of tenure, money, and interest rate. With this precise estimate, you can plan your monthly budget plans and finances.
In addition, planning these can help a borrower to ensure if they have a better plan and make their financial stability a priority without hustling.
Additionally, the impact of FOIR is beyond Personal Loan interest rates and include fees and charges associated with personal loans. Lenders may impose higher processing Personal Loan Fees & Charges if your FOIR is high, as they perceive greater risk in extending credit to individuals with elevated FOIRs. Therefore, maintaining a healthy FOIR not only affects your loan eligibility but also influences the overall cost of borrowing.
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Strategies for maintaining a healthy FOIR for personal loan approval
Maintaining a favorable Fixed Obligation to Income Ratio (FOIR) is important when it comes to securing a loan. Look at the detailed guide on how to ensure a healthy FOIR, enhancing your chances of getting a loan.
Assess existing financial commitments:
You can start by doing detailed research and evaluating your current financial obligations, including EMIs for existing loans, credit card payments, and other fixed monthly expenses. This step is pivotal in understanding and managing your FOIR effectively.
Limit additional debt burden:
Before applying for a personal loan, think and plan to minimise acquiring additional debt. A reduced level of existing debt will impact your FOIR positively, rendering you a more desirable candidate for lenders.
Carefully choose loan amount and tenure:
Be cautious when selecting the loan amount and tenure. Opting for a longer repayment tenure can result in lower monthly instalments which will have a better and improved impact on your FOIR. However, remember that elongated tenures may also incur higher overall interest costs.
Enhance your credit score:
Maintaining a commendable credit score reflects your creditworthiness and significantly enhances your chances of loan approval. Ensure timely repayments on existing loans and judicious management of credit to bolster your credit score.
Provide accurate income details:
Transparent disclosure of your income is imperative for an accurate assessment of your FOIR. Include all sources of income and ensure alignment with official income documents to present a clear financial picture.
Consider Co-borrowers or guarantors :
If your FOIR leans towards the higher end, contemplate involving a co-borrower or enlisting a guarantor with a robust financial standing. This collaborative approach boosts the credibility of your loan application and elevates the likelihood of approval.
Understanding FOIR calculation formula
FOIR Calculation is a straightforward yet crucial step in the loan approval process. It's determined by dividing your total monthly fixed obligations by your monthly income and then multiplying the result by 100.
FOIR=Total Monthly Fixed Obligations/Monthly Income×100
This FOIR formula provides lenders with a comprehensive understanding of your financial commitments, allowing them to assess your loan application more accurately. By knowing your FOIR, lenders can make informed decisions about extending credit, ensuring that you're not taking on more debt than you can handle.
Conclusion
Understanding FOIR is crucial for personal loan approval. FOIR determines eligibility, risk assessment, interest rates, and loan amounts. Maintaining a healthy FOIR is key to securing favourable terms. Strategies like assessing financial commitments, limiting additional debt, choosing loan terms wisely, improving credit scores, disclosing income transparently, and considering co-borrowers can optimise FOIR. Knowing the FOIR formula empowers borrowers to make informed decisions. Ultimately, a balanced FOIR promotes responsible borrowing and financial stability.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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