Banks or NBFCs usually focus on different elements just before approving a loan to a borrower.
Rohit Garg, Co-Founder & CEO, Smartcoin says, “There are three essential aspects or ratios when using the net income of an individual to gauge whether a potential candidate is eligible for receiving a loan – Fixed obligation to income ratio (FOIR), Loan-to-value ratio (LTV), Instalment income ratio (IIR).”
FOIR, the fixed obligation to revenue ratio is one of the most generally employed mainstream variables that monetary entities like banks and loan-dispersal firms use to compute an applicant’s loan eligibility. Also recognized as the debt-to-revenue ratio, the FOIR also requires into consideration the EMI of the stated prospective loan.
How is FOIR calculated?
Experts say the Fixed obligation to revenue ratio is a foundational basis that lenders use to ascertain regardless of whether to course of action a loan application or not. To assure the monetary capability of a receiver to repay the loan, the FOIR is calculated by dividing the total debt by the loan applicant’s month-to-month salary.
FOIR = Total debt / month-to-month salary multiplied by one hundred
Garg says, “To corroborate an applicant’s financial status and FOIR, lenders are liable to undertake an in-depth analysis of their credit history, income sources, assets, and liabilities. Lending companies also delve deep into the slightest income details alongside checking the instalments of existing loans that the applicant is paying.”
He additional adds, “After verifying the FOIR and credit history of the applicant, lending entities will even collect sundry details such as net income, savings history, annual tax, etc.”
The formula for calculating the FOIR of a particular person- FOIR = (Summation of All Existing Obligations/Net Monthly Salary) x one hundred
For Example, if your present salary is 15,000 and you have applied for a loan quantity of 1lakh, the FOIR or the debt to revenue ratio utilizing the aforementioned formula will be- 100000/15000 x one hundred = 666.66
The Impact of FOIR on an applicant’s loan eligibility
The FOIR is used to figure out regardless of whether to sanction a prospective loan application. Experts say a lowered FOIR would imply that an applicant’s month-to-month monetary obligations are significantly reduce than their revenue. This naturally reflects wholesome repayment capacity on the component of the applicant. Therefore, the reduce one’s FOIR, the larger the probability for speedy loan approval as it implies that the applicant’s debt obligations are much less. A low FOIR straight amplifies the applicant’s net disposable revenue by furthering the repayment capacity.
Here are some strategies to lower your FOIR and get effortless loan approvals:
● Apply for Joint loans
One can pick out to apply for a individual loan alongside a co-applicant who could with one’s spouse, sibling, or parent. Garg says “Joint loan proves instrumental in increasing loan approval prospects as in such a case the EMI is conveniently divided between the two co-applicants.”
● Repay your loans on time
There is nothing at all like paying back one’s dues on time to preserve a wholesome and desirable credit score. These dues or monetary obligations could be something ranging from EMIs, credit card payments, overdraft repayment, and so on.
● Low credit utilization ratio
This is the ratio involving an applicant’s credit amounts regarding the maximum credit that can be availed. Garg adds, “As a golden rule, it is prudent to maintain a low credit utilization ratio under the 30 per cent mark.” Note that if one’s Credit Utilization Ratio is observed to be regularly higher, the possibilities of his/her loan application having refused increases.
● Avoid various loans
Industry authorities say, lenders, naturally, favor lending to men and women who are adept at managing their finances. If an applicant has various loans to his/her name such as individual loan, home loan, automobile loan, and so on, it can be seen as a sign of the applicant’s mismanagement of finances.
● Avoid frequent job alterations
Lastly, if a potential applicant has shifted various jobs more than a somewhat quick course of time, they are liable to be seen in a adverse light by the lenders. This decreases their opportunity of having their loan authorized.