What is FOIR and How is it Calculated on a Personal Loan?

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. 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.

Read More: 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, 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.

Read More: Personal Loan Disbursement Process – How it Works?

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.

Read More: Top Reasons for Personal Loan Rejection & How to Recover?

How Does FOIR Affect Personal Loan Approval? 

The FOIR (Fixed Obligation to Income Ratio) significantly influences the approval process for personal loans. Here’s how:

  • Assessment of Repayment Capability: A high FOIR, determined through the FOIR calculator, signals that a significant portion of income is already committed to debts, potentially limiting the ability to handle additional loan repayments.
  • Insight into Financial Management: Lenders use the FOIR calculation formula to gauge an applicant’s financial health; a lower FOIR indicates sound financial discipline and stability.
  • Risk Measurement for Lenders: When the FOIR calculation shows a lower ratio, it suggests a safer bet for lenders, as the borrower has more income available to service the new loan.
  • Influencing Loan Terms: The results from a FOIR calculator aid in determining not only the likelihood of loan approval but also influence the loan amount and its terms, ensuring they fit within the borrower’s financial capacity.

What 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.