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


However, if you don’t have an adequate emergency fund, your first priority would be to keep that surplus aside. Any higher amount should be used to reduce your liability.

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

Rohit Garg, Co-Founder and CEO of Smartcoin, says, “There are three essential aspects or ratios when using an individual’s net income to assess whether a potential candidate is eligible to receive a loan – Fixed Bond to Income Ratio (FOIR), Loan to Value Ratio (LTV), Graded Income Ratio (RII). ”

FOIR, the fixed bond-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 eligibility for the loan. Also known as the debt-to-income ratio, FOIR also takes into consideration the EMI of said potential loan.

How is FOIR calculated?

Experts say the fixed bond-to-income ratio is a fundamental basis that lenders use to determine whether or not to process a loan application. To ensure the financial capacity of a receiver to repay the loan, 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 corroborate an applicant’s financial situation and FOIR, lenders are likely to undertake a thorough analysis of their credit history, sources of income, assets and liabilities. Credit companies also dig into the smallest details of income in addition to verifying existing loan installments that the applicant is paying.
He further adds: “After checking the FOIR and the applicant’s credit history, the lending entities will even collect various details like 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 requested 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 a loan applicant’s eligibility

FOIR is used to determine whether to sanction a potential loan application. Experts say that a reduced FOIR would mean that an applicant’s monthly financial obligations are significantly lower than their income. This naturally reflects a healthy repayment capacity on the part of the applicant. Therefore, the lower the FOIR, the higher the likelihood of a quick loan approval, as it means that the applicant’s debts are less. A low FOIR directly amplifies the applicant’s net disposable income by increasing repayment capacity.

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

● Apply for joint loans
You can choose to apply for a personal loan alongside a co-applicant who could do so with their spouse, siblings or parents. Garg states that “the joint loan is essential to increase the prospects for loan approval, because in such a case, the EMI is conveniently divided between the two co-applicants. “

● Repay your loans on time
There is nothing quite like paying back your dues on time to maintain a healthy and desirable credit rating. These contributions or financial obligations can range from EMIs, credit card payments, overdraft repayment, etc.

● Low rate of use of credit
It is the ratio of an applicant’s credit amounts to the maximum credit that can be used. Garg adds, “As a general rule, it is prudent to keep a low credit utilization rate below 30%. Note that if a person’s credit utilization rate is consistently high, the chances of their loan application being refused increase.

● Avoid multiple loans
Industry experts say lenders naturally prefer lending to people who are skilled at managing their finances. If an applicant has more than one loan in their name like personal loan, home loan, car loan, etc., this can be seen as a sign of the applicant’s mismanagement of finances.

● Avoid frequent job changes
Finally, if a potential candidate has changed multiple 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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