What is FOIR? A Comprehensive Guide to Fixed Obligation to Income Ratio

It is essential to know the factors that determine loan eligibility. Get yourself familiar with one of these factors called FOIR

Before authorizing a loan, all financial institutions, including banks, have to follow strict eligibility standards. When a person applies for a instant personal loan or any other type of loan, they must go through a series of detailed checks before the loan may be approved. This is because the ability to repay a loan is an important factor in determining whether a person is qualified for one. Without this filter, the bank may suffer losses as a result of a candidate's failure to return a loan, leading to non-performing assets and poor debts. To prevent such a situation, financial institutions carry out thorough background checks on applicants. These may include income records, credit repayment records, assets, financial responsibilities, and other factors that may influence the individual's capacity to repay the loan.

There are some factors that a bank looks at before they sanction a personal loan. One of them is a fixed obligation to income ratio (FOIR).

What is FOIR?

FOIR full form is 'Fixed obligations to income ratio' and it's a metric used by banks and other financial institutions to assess an individual's loan eligibility. FOIR is calculated by considering fixed monthly expenses and by keeping out statutory deductions, such as Provident Fund, Investment Deductions, and Professional Tax. Although added obligations, including rent, may be deemed fixed obligations depending on income, a FOIR indicates a candidate's disposable income that they can use to repay existing and new debts. As a result, a person's loan eligibility is heavily influenced by their FOIR.

How is FOIR calculated on a personal loan?

If an individual's FOIR is 50 per cent, it signifies that a maximum of 50 per cent of the individual's monthly earnings is presumed to be their living expenses before the bank disburses a personal loan, home loan, auto loan, or any other type of loan. As a result, the bank will consider the remaining portion of the income when determining the loan amount that the person is entitled to.

You can calculate FOIR using the following formula:

FOIR = Total debt / monthly salary

How can I reduce FOIR at my end?

Some ways in which you can reduce FOIR and increase your chances of getting a personal loan are:

• Try requesting a personal loan with a working co-applicant, such as a partner, parent, or sibling. As the EMI load gets shared, you have a better chance of getting a loan approved.
• Keep positive credit history for all your loans. EMIs, credit card transactions, overdraft repayments, and so on are all examples of this.
• The credit usage ratio is the proportion of your credit amounts to the total amount of credit you have available. While applying for a personal loan, keep the ratio under 30% as a general guideline. The bank will refuse the personal loan application if the potential borrower's credit utilisation ratio is always high.
• Banks prefer to give loans to parties who can handle their money wisely. If an applicant has taken many loans, such as personal, house, and vehicle, it may be interpreted as a hint that the borrower cannot manage his finances properly.
• If a prospective borrower has changed a lot of jobs in a short amount of time, lenders may view this as an unfavourable profile for personal loans.

FOIR stands for Fixed Obligation to Income Ratio, a critical factor financial institutions use to determine an applicant’s loan eligibility. It reflects the proportion of an individual’s fixed monthly obligations—such as loan EMIs, rent, or insurance premiums—to their gross monthly income. This metric helps lenders assess an applicant's disposable income available for repaying new debts.

Why is FOIR Important?
 

FOIR is vital for both lenders and borrowers. Here’s why:

• Risk Assessment: Lenders use FOIR to gauge how much financial burden an applicant already carries.
• Loan Eligibility: A lower FOIR indicates better loan eligibility as it signifies more disposable income.
• Preventing Defaults: By analysing FOIR, lenders can minimize the risk of defaults and ensure financial prudence.
• Loan Amount Determination: FOIR directly influences the loan amount a borrower can qualify for.

How to Calculate FOIR?
 

Formula: FOIR = (Total Monthly Obligations / Gross Monthly Income) × 100

Steps to Calculate FOIR:

1. Determine Fixed Obligations: Add up all fixed monthly commitments, such as:
   • Existing loan EMIs
   • Rent payments
   • Insurance premiums
2. Assess Gross Income: Calculate your gross monthly income (before tax deductions).
   
3. Apply the Formula: Divide total obligations by gross income and multiply by 100 to get the FOIR percentage.

Example:

If your fixed monthly obligations are ₹40,000 and your gross monthly income is ₹1,20,000:

FOIR = (₹40,000 ÷ ₹1,20,000) × 100 = 33.33%

This means 33.33% of your income is committed to fixed expenses.

The FOIR range can significantly influence loan approval decisions:

• Low FOIR (<40%): Indicates a low debt burden. Lenders are more likely to approve your loan.
• Standard FOIR (40%-50%): Represents a balanced debt-to-income ratio, typically acceptable to lenders.
• High FOIR (>50%): Signals heavy financial obligations, reducing chances of loan approval.

Tips to Reduce FOIR and Improve Loan Eligibility
 

If your FOIR is high, here are some strategies to lower it:

• Clear Smaller Loans: Pay off minor debts or EMIs to reduce your fixed obligations.
• Boost Your Income: Look for ways to increase your monthly earnings, such as freelancing or a side job.
• Consolidate Debts: Merge multiple loans into one with a lower interest rate to reduce monthly payments.
• Opt for Longer Tenures: Extend loan repayment terms to lower EMIs and fixed commitments.
• Avoid New Credit: Hold off on taking additional loans or credit cards until your FOIR improves.
• Co-Applicant Support: Apply for loans with a co-applicant to share the financial burden and improve eligibility.

We trust you have understood the basics of FOIR, and how it impacts your personal loans. If you are in the market for a personal loan, look no further than IDFC FIRST Bank. You can get personal loan interest rates that are designed to not weigh you down. To help resolve application-related queries, IDFC FIRST Bank customer support is available on 1800 10 888. If you are concerned about your loan getting rejected, you can always use a personal loan EMI calculator to estimate a feasible amount for you to avail as a personal loan. Use IDFC FIRST Bank’s personal loan EMI calculator available on our mobile banking service to see how much you can afford and what could be a sum you can repay with ease. 

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