What is FOIR in Personal Loan & How to Calculate It

'Fixed Obligation to Income Ratio' or FOIR is a metric that helps financial institutions assess customer’s loan repaying capacity. It indicates your disposable income that can be used to repay newer loans, making it a pretty important term to understand. In this blog, you will learn more about FOIR and its significance in loan approval. Read on!

What is FOIR?

FOIR represents the amount from your monthly income that is fixed to pay off existing debts, loans, subscriptions, credit card bills, and other recurring expenses. It is used by lenders during the loan approval process as a risk indicator, playing a critical role in determining your Personal Loan eligibility .

The logic is simple: your FOIR indicates how much of your monthly income is already committed to scheduled recurring payments. It lowers the total proportion of your income that you can spend, effectively determining how capable you’ll be to pay off a loan.

Ideally, the FOIR value should range between 40% and 50%, which means your total monthly obligations should not exceed 50% of your net monthly income. For those with higher net income, lenders also consider FOIR which goes up to even 60% or 70%.

FOIR Calculator - How is FOIR Calculated?

The FOIR calculation formula is:

Fixed Obligation to Income Ratio = Total Fixed Monthly Obligations / Net Monthly Salary x 100

Here’s an example to help you understand the FOIR formula calculation better:

Mr. X wants to take a Personal Loan of ₹10 Lakh for a tenure of 5 years. His net monthly income is ₹1 Lakh, and the following are his fixed monthly payables:

• ₹5,000 towards Pre-owned Car Loan

• ₹21,500 for Home Loan

After using the Personal Loan EMI calculator , Mr. X finds his monthly EMI for the desired loan amount to be ₹21,742.

FOIR Calculation: (5,000 + 21,500 + 21,742) / 1,00,000 x 100 = 48.24%

Also Read: Can I Take Multiple Personal Loans At Same Time?

Why Is It Essential to Calculate FOIR?

Let’s understand the importance of FOIR calculation for a Personal Loan in a hypothetical situation. Suppose two friends named Rahul and Atul apply for a Personal Loan separately. The lender assessed Rahul’s FOIR to be 55% while Atul’s FOIR was 70%. In this case, the lenders prefer to provide Rahul with his desired loan amount. This is because candidates with lower FOIRs are generally more attractive to lenders because they show a lower risk of default.

Atul, on the other hand, may face some issues in getting a favourable loan sanctioned, as his FOIR suggests more risk for the lender. Thus, a lower FOIR always raises the chances of getting a loan application approved.

Interpreting Your FOIR

Low FOIR (<40%)

This is a good range for your FOIR to be in. It shows prospective lenders that debt and overall finances are handled responsibly, showcasing good financial management. Your overall repayment burden is less, and there is more disposable portion of your monthly income; as a result, you are more likely to receive loan approvals.

High FOIR (>40%)

A high FOIR makes it less likely to get a loan approved. To the lender, a high FOIR indicates that you do not manage your finances well, and are finding it difficult to meet your financial obligations. However, it is still possible to get a loan with a higher FOIR, as lenders have different criteria for the percentage they consider risky.

Ideal FOIR

For most lenders, FOIR above 70% is considered risky. At this level, it is highly unlikely for a loan to be approved. You need to take steps to lower it to around 40 to 50% before applying for a loan.

What is the Difference Between FOIR and DTI?

FOIR stands for Fixed Obligation to Income Ratio, whereas DTI stands for Debt-to-Income ratio. While the purpose of both is to judge the financial obligations of a borrower against monthly payments, their scope is slightly different. Think of FOIR as a subset of the DTI ratio. The DTI includes all debt, both fixed and variable, while the FOIR only considers fixed, recurring expenses.

How Does FOIR Affect Your Personal Loan Approval? 

When you maintain a low FOIR, it impacts your overall financial situation. Here’s how:

1. Your total liabilities are reduced.

2. There is more disposable income.

3. Lenders gain more confidence in your repayment capacity.

These factors combine together to promote your creditworthiness, reduce total liabilities, and improve your loan repayment capacity. In addition, actively maintaining a low FOIR can help you manage your finances in a better way. 

How to Minimise FOIR?

These are a few proven methods that you can follow to minimise your FOIR and improve the chances of a loan approval:

• Pay off the outstanding debts as soon as possible and try to avoid having multiple loans.

• For new loans, apply with a co-applicant, provided the other person has a low FOIR.

• Opt for loan offers only when you are eligible based on the conditions put forward by the lender.

• Provide proof of stable income to the lender.

Finally, always use a FOIR calculator before taking on a loan, and ensure you have an excellent credit score.

To Conclude

 

If your FOIR is on the higher side, you must work towards reducing it before applying for a loan. Otherwise, it will be fairly challenging to get favourable credit offers. While it is far from an instant process, the benefits far outweigh the challenges it presents.

For a hassle-free loan journey, apply for a Personal Loan from Poonawalla Fincorp and benefit from favourable interest rates, flexible repayment terms and more!

Frequently Asked Questions

What are the three factors that influence loan approval?

Lenders judge a prospective borrower’s creditworthiness by financial metrics like:

• Debt-to-income ratio

• Credit score

• Income-to-expense ratio

Based on the results, the borrowers are offered either a secured or unsecured loan with varying conditions. 

What is a good Fixed Obligation to Income Ratio (FOIR) to maintain?

A favourable FOIR must lie between 40% and 50%. So, your total monthly expenses should not exceed 50% of your earnings. A low FOIR is associated with better negotiation power for loans. For people with a higher net worth, lenders consider even higher FOIRs (above 65% to 70%) as ideal for loan deals.

Why is a high FOIR not ideal?

A high FOIR suggests that a large portion of a borrower's income is tied up in existing loans. The lower a person's FOIR, the better their financial health is likely to be. Those with high FOIRs might be under greater financial strain if they take more loans, which can raise concerns about their ability to repay debt. As a result, they are more likely to face loan rejection.

Do all lenders have the same criteria for FOIR?

No, lenders haven’t standardised the margin for FOIR. However, most banks and NBFCs consider a percentage between 40% and 55% as the most favourable. This range is not fixed, though, and is bound to differ according to the loan type and net worth of the borrower.

Is FOIR the same as credit utilisation ratio?

No, they are not the same. Credit utilisation ratio refers to the percentage of credit currently being used. FOIR, on the other hand, refers to the amount of income that goes towards monthly debts. Both, however, are considered measures of financial stability and are thus considered for loan eligibility. 

How is FOIR calculated?

This is the formula to calculate FOIR:

Fixed Obligation to Income Ratio = Total Fixed Monthly Obligations / Net Monthly Salary x 100

What does a 70% FOIR mean?

An FOIR of 70% is not considered desirable at all by lending institutions. To them, it indicates that a prospective borrower has too many existing monthly commitments with their finance, with little income to spare for paying additional loans. Such a borrower is considered high risk, and lenders are unlikely to approve their loans.

What is LTV and FOIR?

Fixed Obligation to Income Ratio or FOIR refers to the level of a person’s income that goes towards debt repayment. Loan-to-Value ratio, on the other hand, refers to the ratio of a loan to the value of the specific asset it was taken to purchase, such as property.

How does FOIR affect my Personal Loan eligibility?

FOIR is a significant factor affecting Personal Loan eligibility. An applicant with an FOIR above 70% is unlikely to get their Loan approved, since it shows a smaller repayment capacity and identifies the borrower as high-risk.

Do my existing debts impact FOIR?

Yes. Your existing loans lead to an increase of total monthly obligations such as loan EMIs, thereby impacting FOIR.