What is FOIR: How it is Calculated

When applying for a Personal loan, one of the key parameters lenders consider to assess your creditworthiness is FOIR – Fixed Obligations to Income Ratio. While factors like credit score, income, and employment history are crucial, FOIR gives a clear picture of how much of your income is already committed toward existing financial obligations. Understanding FOIR can help you prepare better for loan applications and improve your chances of approval.

What is FOIR?

FOIR stands for Fixed Obligations to Income Ratio. It is a measure used by banks and financial institutions to determine how much of your monthly income is already being used to pay fixed obligations such as:

• Existing EMIs (for personal loans, home loans, car loans, etc.)
• Credit card dues (minimum monthly payment considered)
• Rent payments (in some cases)
• Any other fixed monthly commitments

This ratio helps lenders assess your repayment capacity for the new loan you are applying for.

Why is FOIR Important?

Lenders use FOIR to ensure that you are not over-leveraged and that you have sufficient disposable income left after meeting all your existing obligations. A lower FOIR means you have more capacity to take on new debt, which increases your chances of loan approval.

Here’s why FOIR matters:

• Credit Risk Assessment: This helps in evaluating how much debt you can handle responsibly.
• Loan Approval Decision: FOIR is a crucial parameter in approving or rejecting a loan.
• Loan Amount Eligibility: A low FOIR might make you eligible for a higher loan amount.

How is FOIR Calculated?

The FOIR formula is:

FOIR = (Total Fixed Obligations / Net Monthly Income) x 100

Components:

• Total Fixed Obligations: This includes EMIs for all existing loans, minimum credit card payments, and other fixed financial commitments.
• Net Monthly Income: This is your monthly take-home salary (after deductions like taxes, PF, etc.)

Example:

Let’s say your monthly income is ₹80,000, and you have the following obligations:

1. Home loan EMI: ₹20,000
2. Personal loan EMI: ₹8,000
3. Credit card minimum due: ₹2,000
4. Total fixed obligations = ₹20,000 + ₹8,000 + ₹2,000 = ₹30,000

Then,

FOIR = (30,000 / 80,000) x 100 = 37.5%

What is a Good FOIR?

Typically, banks prefer a FOIR of up to 40-50% for salaried individuals. However, this can vary based on the lender and your income level. Higher-income borrowers might get leniency even with a slightly higher FOIR, while self-employed individuals might be evaluated differently.

Here’s a general guide:

Below 40% – Excellent: High chance of approval

40%-50% – Acceptable: Depends on income and credit profile

Above 50% – Risky: Loan may be rejected unless income is very high

Tips to Improve Your FOIR

If your FOIR is too high, here are a few ways to improve it:

• Repay Existing Loans: Try to close smaller loans or high-interest debts to reduce obligations.
• Increase Income: Consider including additional sources of income like bonuses, rental income, or spouse’s income if allowed.
• Reduce Credit Card Usage: Lower your credit card dues to reduce the minimum amount payable.
• Choose a Longer Tenure: Opting for a longer loan tenure can reduce EMI and hence improve FOIR.

FOIR vs Debt-to-Income Ratio (DTI)

While FOIR and DTI are often used interchangeably, FOIR is slightly more specific. FOIR focuses only on fixed obligations, whereas DTI may include all types of debt payments. Indian lenders typically prefer FOIR as it provides a clearer picture of stable outflows.

Final Thoughts

Understanding FOIR gives you an edge when planning to apply for a loan. It allows you to assess your own eligibility beforehand and take corrective steps if necessary. By maintaining a healthy FOIR, you not only increase your chances of loan approval but also ensure better financial health and lower debt stress in the long run.