Consider these 9 things before investing in mutual funds!

A loan assists borrowers in meeting a variety of financial obligations. You will need a loan if you don’t have enough savings to cover the cost of whatever you want, from a house to a car to the latest smartphone. The first and foremost thing a lender looks at when you apply for any type of loan (personal loan, home loan, auto loan, etc.) is your ability to repay the loan.

But why do lenders look at your ability to make payments?  To make sure a borrower can repay the loan in Equated Monthly Installments (EMIs) over a set period of time, lenders assess a borrower’s repayment capacity.

A fixed obligation to income ratio (FOIR) is used by lenders to determine a borrower’s ability to repay the loan. Before approving any type of loan, lenders use FOIR to determine a borrower’s financial capacity.

Quite a few applicants will be turned down as a result of insufficient FOIR, which reduces their chances of being accepted. Lenders are reluctant to make a loan to someone who doesn’t have enough FOIR.

What is FIOR?

Fixed obligations refer to the whole amount of debt that a person owes at a certain point in time. All of an applicant’s monthly fixed obligations are taken into account when calculating the FOIR. You may have existing fixed obligations, such as EMIs on a loan or a balance on a credit card.

After that, your monthly income is taken into account by the lender when determining your FOIR. The EMI of the loan you’re applying for is taken into account as well by fixed obligations. For the most part, lenders expect borrowers to keep their monthly expenses to 50% or less of their gross income, including their existing loan EMI.

A borrower should not spend more than half of his monthly income on credit card or loan EMIs, to put it another way. You should also check with the lender before applying for a loan because FOIR varies from one lender to another for various persons. Someone earning Rs 1 lakh per month have different FOIR criteria than people earning Rs 20,000 per month, for example.

Importance of FIOR

It’s critical to understand how FOIR affects your loan eligibility before applying for any type of loan. Many people have had their loan applications turned down by lenders who failed to consider their FOIR.

A smaller FOIR, on the other hand, indicates that a person has less outstanding obligations (such as loan or credit card EMIs), resulting in greater repayment ability and increased acceptance prospects, among other things.