What is Loan Affordability?
Before applying for a loan, you must know how much debt you can safely handle without straining your monthly budget. A Loan Affordability Calculator looks at your monthly income and current obligations to estimate the maximum loan amount a bank is likely to approve, and more importantly, what you can comfortably repay.
The FOIR Rule
Banks use a metric called the Fixed Obligation to Income Ratio (FOIR) to determine loan affordability.
FOIR represents the percentage of your monthly income that goes toward paying fixed obligations (like existing EMIs and rent). Most banks prefer a FOIR of 40% to 50%. If your current obligations already consume 40% of your income, you will struggle to get approval for a new loan.
Even if a bank is willing to approve a large loan based on a 50% FOIR, financial planners recommend keeping your total EMI commitments below 30% of your net take-home salary to ensure you can still invest for emergencies and retirement.