Fixed Obligation to Income Ratio or FOIR is a parameter used by lenders to check how much of your income goes into paying fixed obligations. This is particularly useful for lenders when they are screening a loan application for approval. Let us deep dive into what FOIR means and its calculation for a personal loan.

What is FOIR?

FOIR or Fixed obligation to income ratio is often used by lenders as an important parameter while scrutinizing a loan application. The main obligation component here is EMI or equated monthly installment. It calculates how much of your income goes into paying EMIs and other payments. The higher the ratio is, the more your income is used in paying for EMIs. Lenders consider a high FOIR as the applicant’s inability to pay any further debt.

How is FOIR Calculated for a Personal Loan?

The calculation of FOIR is a simple formula stated below –

(Fixed obligations/Income) *100

Fixed obligation here refers to EMIs, credit card payments, living expenses, rent, etc. The total of these expenses is divided by the gross total income and then multiplied by 100.

Note – FOIR does not consider tax deductions and contributions towards fixed and recurring deposits as part of the fixed obligations.

FOIR calculation with an example 

Let us assume the applicant’s monthly income is Rs. 80,000. Their fixed monthly financial obligation includes rent of Rs.10,000, Auto loan EMI of Rs.8000, and living expenses of Rs. 15,000. Their FOIR calculation will be as below –

(10,000+8,000+15,000)/80,000 * 100 = approximately 41.25%

This means that 41.25% of the income is engaged in paying fixed obligations and the rest is available for any new loan payments.

Impact of FOIR on a Personal Loan Approval

  1. Average value of FOIR considered good by lenders is between 40-55%. This ideal value can be different for high-net-worth individuals.
  2. The lower the ratio is, the more disposable income you have in your hand. The chances of loan approval are higher in this case.
  3. The higher the ratio is, the more fixed obligations you have. This means that your disposable income might not be enough to pay for another loan. The chances of loan rejection are very high in this case.

Ways to Reduce FOIR

  1. Apply for a joint loan – Applying for a joint loan means the financial obligation is shared by the applicants. Hence, it reduces your fixed obligation to that extent.
  2. Maintain a healthy credit history – Pay your bills on time and clear your dues. This helps in maintaining a lower credit utilization ratio and hence helps in maintaining a healthy credit history. A healthy practice like this will eventually help to maintain a good FOIR.
  3. Avoid having multiple loans – Having multiple loans gives the impression of having too many financial obligations. It can also come across as your inability to manage your finances well.
  4. Avoid frequent job switches – Lenders may perceive many job switches as instability in job security. That may not work very well while approving a loan.

Conclusion

FOIR or Fixed obligation income ratio is an important parameter considered by lenders while approving a personal loan. It reflects how much of the applicant’s income is already going into paying fixed obligations which include EMIs, rent, living expenses, etc. The higher the ratio is, the lower your capability to pay for any further loan. Maintain the FOIR between 40-55% to have a good chance at loan approvals.

FAQ of What is FOIR and How is it Calculated for a Personal Loan

1:What is FOIR?

The fixed obligation to income ratio is a parameter that tells how much of the applicant’s income is going into paying fixed monthly obligations like EMIs, rent, living expenses, etc.

2:How is FOIR calculated for a personal loan?

FOIR is calculated as (Fixed obligations/Gross total income) *100

3:What is a good FOIR to maintain?

FOIR between 40-55% is generally considered good for a loan application to be approved.

4:What do lenders calculate FOIR?

FOIR is considered an important metric by banks and other financial institutions to assess an applicant’s creditworthiness.

5:Are payments towards investments considered a part of fixed obligations?

No, payments towards fixed deposits, recurring deposits, tax deductions, etc. are not considered a part of fixed obligations.

6:Do all banks have the same criteria for FOIR?

Most banks and financial institutions require the FOIR to be between 40-55%. However, this ratio can be changed on a case-to-case basis depending on the applicant’s net worth etc.