FOIR : Full Form and Meaning
Fixed Income to Obligation Ratio (FOIR full form) is a critical factor lenders consider to evaluate a borrower’s loan repayment capacity. Similar to the debt-to-income ratio, FOIR calculation reveals the portion of a person’s income that is dedicated to fixed financial commitments.
The FOIR calculation formula is straightforward: divide the borrower’s fixed monthly obligations by their gross monthly income. This ratio includes all fixed monthly expenses, such as loan repayments, provident fund contributions, etc. certain variable expenses like rent may also be counted as fixed obligations based on the borrower’s income level.
A balanced FOIR indicates a healthy financial status, increasing the borrower’s chances of loan approval. It’s a simple yet powerful way for lenders to assess financial stability and repayment ability.
How is FOIR Calculated?
FOIR Formula
The FOIR calculation formula is a straightforward method lenders use to determine a borrower’s ability to manage new debt with debt consolidation loan. To perform the FOIR calculation, lenders sum up all monthly debts, including monthly loan EMIs, credit card bills, and any other monthly financial obligations. This total debt is then divided by the applicant’s net monthly income. The result is then multiplied by 100.
For instance, let’s consider an applicant with a net monthly income of INR 50,000. Suppose their monthly obligations include a home loan EMI of INR 15,000, a car loan EMI of INR 5,000, and credit card bills amounting to INR 10,000. The total monthly debt here is INR 30,000. How to calculate FOIR in this case? According to the FOIR formula, the FOIR is calculated as (30,000 / 50,000) * 100, which equals 60%. This high percentage suggests a significant portion of income is already committed, potentially affecting loan eligibility. For the same calculation, you can also use FOIR calculator alternatively.
Also Read: Personal Loan EMI Calculator
FOIR Calculation On Personal Loan
How to calculate FOIR for personal loans? First, you add up all the monthly payments you already have, like your home loan to renovate, car loan, any credit card bills, and regular expenses like rent. This total is your monthly financial commitment. Then, take this total and divide it by your total monthly income. To get the FOIR, multiply this number by 100.
Here’s an example to understand this better.
Consider your monthly income is ₹30,000 and your financial commitments include a car loan EMI of ₹4,000 and a property loan EMI of ₹15,000. Despite your need for a personal loan, there’s a possibility that your application is declined.
Here’s a FOIR calculation with example:
Total Income: ₹30,000
Total Obligations: ₹4,000 + ₹15,000 = ₹19,000
FOIR Calculation with Example: [₹19,000 / ₹30,000] x 100 = 63.33%
For personal loan applicants, an ideal FOIR should be less than 50-60%. Because your FOIR exceeds this threshold, your loan application may get rejected.
Also Read: Top Reasons for Personal Loan Rejection & How to Recover?
How Does FOIR Affect Personal Loan Approval?
Understanding FOIR's Impact on Loan Eligibility & Terms
FOIR (Fixed Obligation to Income Ratio) plays a critical role in personal loan approvals. Here’s how it influences your chances and the terms you might receive.
Assessment of Repayment Capability
A high FOIR signals more of your income is committed to debts, which may restrict your ability to manage new personal loan repayments.
Insight into Financial Management
Lenders use the FOIR calculation formula to evaluate your financial discipline; a lower FOIR reflects stability and responsible credit management.
Risk Measurement for Lenders
A lower FOIR ratio suggests lower lending risk, as borrowers with more disposable income are better positioned to service new loans.
Influencing Loan Amount & Terms
FOIR results guide lenders in setting loan amounts and terms matching your repayment ability, thus securing mutually beneficial lending agreements.
Want to Check FOIR Before Applying?
Estimate your FOIR online with a FOIR calculator and strengthen your personal loan application.
Apply NowWhat are Ways in Which FOIR Can Be Reduced?
Reducing your FOIR can significantly enhance your prospects of securing a personal loan. Here are some effective strategies.
Minimize Multiple Loan Commitments
If you’re juggling several loans (like home, car, or business loans), it can give lenders the impression that you’re over-leveraged. Fewer loans signal better financial management, positively impacting your FOIR calculation.
Opt for Debt Consolidation
Consolidating multiple loans into a single one can be beneficial. This strategy often results in lower total monthly installments compared to the combined payments of all existing debts, effectively reducing your FOIR.
Apply with a Co-Applicant
For loans like home loans, having a co-applicant with their own income – be it a family member, parent, or spouse – can help. This reduces your individual FOIR as the EMI burden is shared, making only a part of the EMI your personal obligation.
Maintain Low Credit Card Utilization
Keeping your credit card utilization ratio below 30% reflects positively on your financial discipline. This factor is crucial in the FOIR calculation with example, as it enhances your likelihood of loan approval by showing responsible credit behavior.
Conclusion:
Understanding and managing your FOIR is key to maintaining financial health. To bring down your FOIR, just focus on a few key things. Try to combine your loans into one, get someone like a family member to apply for the loan with you, and keep your credit card spending in check. Doing this can really help in getting your loan approved and it is a good way to show you’re on top of your financial health. Think of it like cleaning up your financial house – it’s not just for the bank, but for your peace of mind too. Remember, a lower FOIR not only opens doors to new credit opportunities but also ensures that you’re on a sustainable financial path, balancing your current obligations with future aspirations.
Frequently Asked Questions
What is FOIR?
FOIR, or Fixed Obligation to Income Ratio, is a measure used by lenders to evaluate a borrower’s loan repayment capacity. It compares the total monthly fixed obligations of a borrower to their monthly income.
How Is FOIR Calculated For A Personal Loan?
For personal loans, FOIR is calculated by adding up all monthly fixed obligations (like EMIs and credit card bills) and dividing this total by the borrower’s monthly income. The result is then multiplied by 100 to get a percentage.
What Is A Good FOIR To Maintain?
A good FOIR to maintain is typically below 50-60% of your income. Lower FOIR percentage indicates a healthier balance between income and obligations, making loan approvals more likely.
Why Do Lenders Calculate FOIR?
Lenders calculate FOIR to assess the financial stability of a borrower and their ability to take on additional debt. It helps in determining the risk associated with extending credit to the individual.
Are Payments Towards Investments Considered A Part Of Fixed Obligations?
Payments towards investments are usually not considered in fixed obligations for FOIR calculations. FOIR typically includes debts like loan EMIs and credit card payments, not investment contributions.
Do All Banks Have The Same Criteria For FOIR?
Not all banks have the same criteria for FOIR; there can be variations in the percentage considered acceptable and the types of obligations included. Each bank sets its own thresholds and policies based on its risk assessment strategies.
