FOIR meaning and its effect on Personal Loan approval

FOIR, or Fixed Obligations to Income Ratio, measures a borrower’s financial obligations against their income. Lenders use FOIR to evaluate loan repayment capacity by considering existing EMIs, rent, and other commitments before approving a loan. Lower FOIR indicates higher eligibility.

In a nutshell, FOIR measures your fixed monthly outgo as a percentage of your net monthly income. The result indicates your disposable income and whether or not it will be sufficient for loan repayment. As the risk borne by a lender is higher in the case of unsecured loans, your FOIR holds significant weight when a lender is assessing your personal loan eligibility. The FOIR calculation also includes EMIs payable towards a prospective loan an applicant has requested with the lender. It is also known as the debt-to-income ratio. Use our Personal Loan EMI Calculator to calculate your EMIs.

Ideally, your FOIR must be between 40% and 50%. This means that your total monthly expenses should not be more than 50% of your income. Specific lenders consider FOIR which goes up to 65% or even 70% for those with a high net worth.

Why is FOIR calculation essential?

FOIR calculation is crucial as it helps lenders assess a borrower’s repayment capacity by comparing fixed obligations to income. It ensures borrowers don’t face financial strain while repaying loans and helps lenders minimize risks by approving loans responsibly.

How is FOIR calculated?

You can use the following formula to calculate FOIR.

The FOIR calculation formula is:

FOIR = (Total Monthly Loan Obligations / Gross Monthly Income) x 100

Understand it with the help of the following example: An individual has applied for a personal loan of Rs. 5 lakh for five years. If his net monthly income is Rs. 80,000 and his fixed expenditures include the following:

• Rs. 5,000 as EMI towards a car loan
• Rs. 7,000 as EMI towards a home loan
• Monthly rent equals Rs. 8,000
• Other fixed payments comprise Rs. 8,000

Also, the EMI calculated for his prospective loan is Rs. 11,377.
His FOIR = (5,000 + 7,000 + 8,000 + 8,000 + 11,377)/80,000 x100 = 49.2%.
Here, fixed monthly obligations include:

• Credit card payments
• Existing EMIs
• Rent payments
• Monthly living expenses
• EMI of the loan that you are applying for
• Other debt obligations, if any

However, contributions to fixed or recurring deposits and taxes payable are not considered fixed monthly obligations.

How lenders calculate FOIR?

Lenders calculate FOIR using the formula:
FOIR = (Total Fixed Obligations ÷ Monthly Income) × 100

Fixed obligations include EMIs, rent, and other debts. This percentage helps lenders evaluate a borrower’s repayment capacity, ensuring the loan doesn’t exceed their financial limits.

Interpreting your FOIR

Understanding your FOIR is crucial for financial planning and loan eligibility. Here's how to interpret it:

• Low FOIR (Below 40%): Indicates strong repayment capacity and higher chances of loan approval.
• Moderate FOIR (40%-60%): Suggests manageable obligations but may limit loan eligibility.
• High FOIR (Above 60%): Signals financial strain, reducing the likelihood of loan approval.

Lenders prefer lower FOIR as it reflects a borrower’s ability to handle additional loans. To improve FOIR, reduce fixed obligations or increase your income. A balanced FOIR ensures better financial health and eligibility.

The importance of FOIR calculation in loans

FOIR calculation plays a significant role in determining loan eligibility and ensuring financial stability. Here's why it matters:

Repayment capacity Assessment: Helps lenders evaluate if borrowers can manage new EMIs along with existing obligations.

Risk mitigation: Prevents over-lending and minimizes the risk of defaults.

Loan approval Criteria: Acts as a key factor in determining whether a loan application will be approved.

Financial discipline: Encourages borrowers to maintain a healthy balance between income and expenses.

By understanding FOIR, borrowers can plan their finances better and improve loan eligibility by reducing existing debts or increasing income, ensuring a smoother loan application process.

How does FOIR affect personal loan approval?

Maintaining low FOIR impacts your finances in the following ways:

• Reduces the total liabilities
• Disposable income increases
• Improves repayment capacity

Such factors favour an applicant’s creditworthiness, thus improving his/ her chances of getting loan approval.

Individuals with a higher FOIR can improve their approval chances by employing the following techniques:

• Pay off an outstanding loan liability.
• Apply with a co-signer who holds a low FOIR.
• Fulfil all other eligibility criteria laid down by the selected lender.
• Disclose any other regular source of income to the lender.

How can I reduce FOIR ?

If you have a high FOIR, follow these steps to boost your chances of loan approval:

Clear Existing Loans: Pay off outstanding liabilities to reduce your FOIR.

Add a Co-signer: Apply with a co-signer who has a low FOIR.

Meet Eligibility Criteria: Ensure you fulfill all other lender requirements.

Disclose Extra Income: Inform the lender about additional income sources to enhance your application.

These measures can help you present a stronger financial profile and improve your loan approval chances.

If your FOIR is high, take measures to reduce it before applying for a loan. Typically, with a high credit score and low FOIR, you can conveniently secure ample funds through a personal loan.

Conclusion

FOIR is a critical metric for both borrowers and lenders, ensuring responsible lending and financial stability. By maintaining a healthy FOIR, borrowers can improve their loan eligibility and manage finances better, while lenders mitigate risks and approve loans confidently.