What is FOIR & How to Calculate It?

What is FOIR?

When you apply for a loan, be it a personal loan or home loan, the chances of approval and getting the funds greatly depend on whether you meet the lender’s eligibility requirements. The financial institution determines your eligibility based on various parameters, and one such parameter is FOIR.

Wondering what FOIR full form is. FOIR is an acronym for Fixed Obligation to Income Ratio. It is an important financial metric that lenders consider to determine the loan applicant’s ability to repay the amount they wish to borrow. The ratio informs the lender about the borrowers' monthly financial obligations and how much money they can afford to repay for the new loan.

Generally, all lenders have a maximum FOIR limit, which varies based on the type of loan you want to avail. A lower FOIR means you have a strong financial capacity to repay the amount, which allows you to get the loan sanctioned without any hassles with favourable terms and conditions.

Now that you know about FOIR meaning, let us know about FOIR formula

How is FOIR Calculated?

Lenders calculate the loan applicant’s FOIR by dividing their fixed financial obligations by their gross monthly income. They use the following formula for FOIR Calculation.

FOIR = (total debt/monthly salary) x 100

Your monthly debts will include all the necessary expenses you incur in a month, like utility bills, groceries, education fees, EMIs, etc. However, it does not include taxes, PF and investments.

Let us understand FOIR calculation with an example.

Mr. Rajesh Sinha is a 40-year-old salaried employee. His monthly income is Rs. 70,000. Last year he took a bike loan, and he paid an EMI of Rs. 10,000 every month. Additionally, his family’s regular living expenses amount to Rs. 25,000.

Thus, Mr Sinha’s monthly financial obligation is about Rs. 35,000 (10,000 + 25,000), so he is left with a disposable income of Rs. 35,000 (70,000 salary – 35,000 expenses).

FOIR = (35,000/70,000)x100 = 50%

From the above calculations, it is clear that Mr. Sinha has about 50% of his income left to pay the EMI of the new loan. So, if he meets the lender’s eligibility criteria and submits the necessary documents, he will get his loan approved.

How to reduce FOIR?

If the lender rejects your loan application on grounds of high FOIR, don’t be disheartened. You can use the following tips to lower your FOIR.

• Find a way to increase income :
  

  One of the best ways to lower your FOIR is to increase your monthly income. You can take a second job, like freelancing in your free time or during weekends, or start a new side business. Once your income increases, you can use the additional amount to repay the loan.

• Pay off the debt :
  

  If you have any debts like a personal or car loan, try to pay off the amount as soon as possible. You can prioritise paying off high-interest loans like credit card dues and then work your way around other debts. Once you pay off the dues, your disposable income will automatically increase and your FOIR will reduce.

• Choose a longer repayment tenure :
  

  By extending the repayment tenure of the loan, you can lower your EMI, meaning you can easily afford to repay the debt. However, you must be wary that increasing the loan tenure also increases the overall interest pay out.

• Borrow less :
  

  When you apply for any loan, consider your need and choose the amount carefully; borrow only as much as you need. A lower debt means, your EMI will be less so will be your FOIR.

• Improve your credit score :
  

  If you have a high credit score, it means you have a strong credit history. For lenders, this is a big plus, and they would consider you a low-risk borrower. So, by improving your credit score, you would be in a better position to negotiate better loan terms, including lower FOIR.

• Have a guarantor :
  

  When you have a guarantor or a co-signer for your loan, the lender will consider the income of both of you, meaning you would have a higher disposable income to pay the loan and your FOIR will be low. However, you must find a willing co-signer or a guarantor who would trust you to repay the loan on time.

Impact of FOIR on personal loans

FOIR is a critical determinant of your financial standing and ability to repay the loan. Hence, all lenders consider your FOIR to assess your eligibility. It is relevant for all kinds of loans, such as home loans, personal loans etc. But lenders give FOIR great importance, especially for personal loans.

Since a personal loan is an unsecured loan, and the lenders don’t demand any collateral as security against the amount they sanction, it increases the risk factor for them. In case you default on the loan repayment, the lender will face a huge loss. Hence, to avoid such risk, the lenders are usually stringent with their eligibility criteria, especially FOIR.

If you have a high FOIR while applying for a personal loan, they will know that you have less disposable income, which means your creditworthiness is also less. In such a case, the lender may reject your application or levy a higher interest rate than for other applicants with lower FOIR.

FOIR also has a significant impact on the loan processing time. If your FOIR is high, the lender may take longer to process your application as they will assess your creditworthiness before approving the loan.

Do all financial institutions have a standard FOIR?

No, the lenders do not have a uniform FOIR for all types of loans. Each lender may have their own FOIR criteria based on different factors like borrower’s income, past loan history, loan amount, employment status, loan tenure and other financial obligations.

For a secured loan like a home loan, where the lenders have the security of the asset, they may have a higher FOIR. But for unsecured loans like personal loans, the FOIR requirement will be less.

Final Word

Many loan applicants don’t have any idea about FOIR, and they don’t understand its importance. Since it represents your repayment capacity, it is one of the primary factors that lenders consider while assessing your loan eligibility. So, be aware of your FOIR, and use the tips mentioned above to reduce it. This will increase your chances of getting your loan sanctioned.