What is FOIR (Fixed Obligation to Income Ratio)?

FOIR full form is Fixed Obligation to Income Ratio. It is a key financial metric lenders use to assess a borrower’s ability to repay a loan. FOIR reflects the ratio of your fixed monthly obligations, such as existing loan repayments, rent, and other commitments, to your monthly income. This ratio is crucial in determining your eligibility for various types of loans, including personal loans.

The higher your FOIR, the less room you have for additional loan repayments. Lenders consider this ratio to decide whether or not you can take on more debt. A lower FOIR means you have more disposable income, increasing your chances of getting loan approval.

Importance of FOIR calculation

Some of the reasons why FOIR is crucial when it comes to personal loans are:

• Risk assessment: It allows lenders to understand how much financial burden you already have.
• Loan eligibility: A lower FOIR means better eligibility for loans.
• Avoiding defaults: By assessing FOIR, lenders can reduce the risk of loan defaults.
• Loan amount: FOIR influences the amount of loan you can be approved for.

How is FOIR calculated for Personal Loan?

1. Formula of FOIR

FOIR is calculated using the following formula:
FOIR = (Gross Monthly Income / Total Monthly Obligations) × 100

2. Steps to calculate FOIR

Here’s how to calculate FOIR:

Step 1: Add up all your fixed monthly obligations, such as existing loan EMIs, rent, and insurance premiums.

Step 2: Determine your gross monthly income before taxes.

Step 3: Apply the FOIR formula to determine the value.

Step 4: Evaluate the FOIR percentage to determine if it meets the lender’s criteria.

3. Example of FOIR calculation

Suppose your fixed obligations are ₹30,000 and your gross monthly income is ₹1,00,000. In this case, FOIR will be as below:
FOIR = (30,000 ÷ 1,00,000) x 100 = 30%
It means that 30% of your income is tied to fixed obligations and this will impact your personal loan eligibility.
If you are looking for a Personal Loan, you can explore some of the top options offered by Axis Bank.

How FOIR impacts Personal Loan eligibility

If you want to know what is what is FOIR in personal loan, you must understand how it impacts your personal loan eligibility:

• Low FOIR: A low FOIR (usually below 40%) indicates a low debt burden. You are more likely to be approved for a personal loan as you have more income left for repayments.
• High FOIR: A high FOIR (above 50%) suggests you have significant debt obligations. This could negatively impact your loan eligibility as lenders may perceive you as a higher risk.
• Standard FOIR: Most lenders prefer a FOIR between 40% to 50%. This standard range signals a balanced debt-to-income ratio and makes you eligible for a loan without posing much risk.

You can also use online personal loan eligibility calculator for easy understanding.

Tips to reduce high FOIR

If your FOIR is too high, you can follow below-mentioned steps to lower it:

• Reduce your fixed obligations by clearing smaller loans or EMIs.
• If possible, boost your monthly income to lower your FOIR percentage.
• Combine multiple loans into a single one with a lower interest rate to reduce your monthly commitments.
• Avoid taking on new loans or credit cards until your FOIR improves.
• Ask for longer loan tenures, which could lower your EMIs, thereby reducing your fixed obligations.

Conclusion

FOIR is essential, both from a lender's and borrower’s perspective. By keeping your fixed obligations in check and managing your income well, you can maintain a favourable FOIR and improve your chances of securing a loan. Always ensure to monitor your FOIR so that you can stay financially prepared when applying for loans. 

Also Read: Understanding the need for a Personal Loan co-applicant

FAQs

How are LTV and FOIR different?

LTV (Loan to Value) assesses the loan amount compared to the asset's value, while FOIR focuses on your ability to repay by evaluating your income and fixed obligations.

Is FOIR considered for all types of loans?

Yes, FOIR is considered for most loan types, including personal loans, home loans, and car loans.

How to check FOIR?

To check your FOIR, add up your fixed monthly obligations and divide them by your gross monthly income. Then multiply by 100 to get the percentage.

How much is the ideal FOIR?

An ideal FOIR is usually between 40% to 50%, balancing debt obligations and loan repayment capacity effectively.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.