Understanding FOIR: Calculation, Importance & Impact on Loan Eligibility

When applying for a loan, understanding your eligibility is crucial. One of the key factors lenders assess is your Fixed Obligation to Income Ratio (FOIR). This metric plays a significant role in determining whether you qualify for a loan and how much you can borrow. In this article, we will dive into FOIR, its calculation, significance, and impact on loan eligibility, along with examples to make it clearer.

What is FOIR?

FOIR, or Fixed Obligation to Income Ratio, is a metric used by lenders to evaluate a borrower’s financial health. It measures the proportion of a borrower’s fixed obligations (such as EMIs, rent, and other recurring expenses) against their net monthly income. Essentially, FOIR helps lenders assess how much of your income is already committed to fixed expenses and how much is available to repay new loans.

How is FOIR Calculated?

FOIR is calculated using the following formula:

FOIR = (Total Fixed Obligations / Net Monthly Income) × 100

Here’s a breakdown of what goes into the calculation:

• Total Fixed Obligations: This includes your current EMIs (for existing loans), credit card dues, rent, and any other fixed monthly payments.
• Net Monthly Income: This is your income after deducting taxes and other mandatory deductions.

Example of FOIR Calculation:

Let’s say you live in Chennai and earn a net monthly income of ₹1,00,000. You currently pay ₹20,000 as home loan EMI, ₹5,000 as car loan EMI, and ₹10,000 as rent. Here’s how your FOIR would be calculated:

Total Fixed Obligations = ₹20,000 (home loan EMI) + ₹5,000 (car loan EMI) + ₹10,000 (rent) = ₹35,000

Net Monthly Income = ₹1,00,000

FOIR = (₹35,000 / ₹1,00,000) × 100 = 35%

In this example, your FOIR is 35%, which means 35% of your income is committed to fixed obligations.

Importance of FOIR

FOIR is significant because it directly impacts your loan eligibility. Lenders use FOIR to assess your repayment capacity. A lower FOIR indicates that you have more disposable income available to repay additional loans, making you a safer bet for lenders. Conversely, a higher FOIR suggests that a large portion of your income is already tied up, which could increase the risk of default.

Impact of FOIR on Loan Eligibility

1. Loan Approval: Lenders generally prefer a FOIR below 50-60% for salaried individuals and 65-70% for self-employed individuals. If your FOIR is too high, your loan application might be rejected, or the loan amount offered could be lower than what you applied for.
2. Interest Rates: A lower FOIR can also help you secure better interest rates. Lenders might offer you lower rates if they see that your income comfortably covers your fixed obligations and the new loan’s EMIs.
3. Loan Amount: The loan amount you are eligible for is directly influenced by your FOIR. For example, if your FOIR is already high, lenders may restrict the loan amount to ensure that your total obligations don’t exceed a manageable level.

Example of Impact on Loan Eligibility:

Continuing with the previous example, suppose you want to take a personal loan with an EMI of ₹25,000. If this new EMI is added to your existing obligations, your total obligations would be ₹35,000 + ₹25,000 = ₹60,000.

Your new FOIR would be:

FOIR = (₹60,000 / ₹1,00,000) × 100 = 60%

With a FOIR of 60%, lenders might be hesitant to approve the loan or might offer a lower loan amount to keep your FOIR within acceptable limits.

How to Improve FOIR?

If your FOIR is high and affecting your loan eligibility, here are a few strategies to improve it:

• Increase Income: Look for ways to increase your net monthly income, such as through a salary hike or additional sources of income.
• Reduce Fixed Obligations: Pay off existing loans or reduce unnecessary fixed expenses like luxury subscriptions or high rent.
• Opt for Longer Tenure: Choose a longer loan tenure to reduce the EMI amount, which can help lower your FOIR.

Conclusion

FOIR is a critical factor in loan eligibility, directly influencing your chances of approval, the interest rates offered, and the loan amount you can borrow. Understanding how FOIR works and how to manage it can greatly enhance your ability to secure loans on favorable terms. Before applying for a loan, calculate your FOIR to ensure you are well within the lender’s acceptable range, thus increasing your chances of approval.

By managing your fixed obligations and ensuring a healthy FOIR, you can confidently apply for loans, knowing that you have a strong case for approval.

FAQs

1. What is the full form of FOIR?

The full form of FOIR is Fixed Obligation to Income Ratio. It is a key financial metric used by lenders to assess a borrower’s ability to repay a loan.

2. What is the difference between LTV and FOIR?

• FOIR (Fixed Obligation to Income Ratio): Measures a borrower’s ability to repay a loan by comparing monthly fixed obligations to net monthly income. It’s crucial for determining personal loan eligibility.

• LTV (Loan to Value Ratio): Represents the ratio of the loan amount to the appraised value of the collateral (e.g., property). It’s primarily used in secured loans like home loans to assess the risk for the lender.

3. How to increase FOIR for a personal loan?

To increase your FOIR (making it more favourable for loan approval):

1. Repay Existing Debts: Clear off smaller loans or credit card dues to reduce your fixed obligations.

2. Increase Your Income: Explore ways to increase your income, such as a salary raise, bonuses, or secondary income sources.

3. Opt for Longer Tenure Loans: This will reduce the monthly EMI, thereby lowering your fixed obligations.

4. Avoid New Debts: Hold off on taking new loans or credit until after your personal loan is approved.

By improving your FOIR, you enhance your chances of personal loan approval with better terms.