What Is FOIR And How Is It Calculated For A Personal Loan

All lending institutions, before approving a loan, follow multiple levels of checks and stringent eligibility criteria to judge a loan applicant's credit worthiness. When a person applies for any type of loan, the primary concern of all banks and NBFCs is the applicant's capacity to repay the loan in equated monthly installments (EMIs).

Without this precautionary measure, banks may suffer losses with mounting non-performing assets and poor debts. To narrow down the risks, banks run a thorough background check on the income documents, credit repayment history, financial liabilities and other determinants that may affect the loan repayment ability of an individual. Based on the income of a borrower, banks calculate 3 different ratios that regulate the eligibility for a loan. These include the:

• Fixed obligation to income ratio (FOIR)
• Loan-to-value ratio (LTV)
• Installment income ratio (IIR)

FOIR Meaning

Fixed Income to Obligation Ratio (FOIR) is a metric that helps lenders decide a borrower's ability to repay the loan. It is commonly referred to as the debt-to-income ratio. FOIR is used by lenders to check how much of the income goes into paying fixed obligations.

It is calculated by dividing the borrower’s fixed obligations by their monthly gross income.

It takes into account all the fixed monthly obligations that a person should meet after keeping out the statutory deductions like tax deductions and contributions towards fixed and recurring deposits, Provident Fund, investment deductions, or Professional Tax. Here it must be noted that additional expenses such as rent can also be considered as fixed obligation depending on the level of income.

In a nutshell, FOIR reflects the disposable income of a candidate that can be used to pay off the existing as well as the new debt.

Calculating FOIR

To get the FOIR the total monthly debt of the applicant, including existing EMI payments, Credit Card bill amounts, rent, and living expenses must be divided by the gross total monthly income of the applicant and then it must be multiplied by 100.

FOIR = (Sum of All Existing Obligations/Net Monthly Salary) * 100

The margin of FOIR varies from bank to bank and from case to case. However, lenders usually set a maximum FOIR limit depending on the loan type. In most scenarios, the required FOIR or Equated Monthly Income/Net Monthly Income (EMI/NMI) ratio for loan eligibility ranges from 40% to 60%. A lower FOIR generally indicates a stronger financial position that can help to get better loan approval terms.

FOIR Calculation On Personal Loan

The risk of the lenders involved with any unsecured loans like personal loans is manifold. FOIR for personal loans is the total of all existing financial obligations (like EMIs, credit card payments, living expenses, rent, etc.) divided by the net monthly income, multiplied by 100. Considering an example can be convenient at this stage.

Suppose Mr. X has a monthly income of ₹30,000. His monthly obligations include a car loan installment of Rs 4, 000 and a property loan installment of Rs 15, 000. Now Mr. X plans to take a personal loan to fund his family's foreign trip. But his loan application gets rejected. Let's find out why.

In this case:

Mr. X’s total income is Rs 30,000

Total financial obligation is (Rs 4,000+ Rs 15,000) = Rs 19,000

Mr. X's FOIR = [19000/30000]X 100 = 63.33%

Ideally all personal loan applicants should have FOIR or EMI/NMI ratio less than 50-60%.

Mr. X’s FOIR is more than 60%. As per the lender's assessment Mr. X may have difficulty paying back all EMIs since his FOIR is already over 50% of his current income.

Ways To Reduce High FOIR

A higher FOIR indicates larger fixed obligations that contribute to unfavourable loan terms. Since FOIR impacts personal loan approval, it is good to maintain a low FOIR. Stated below are some ideas that can help reduce FOIR:

• Extend Loan Tenure:

Increasing the total tenure of the loan repayment period can reduce the EMI obligations. It, in turn, can help to improve the ratio.

• Manage A Co-Applicant:

Applying for a loan with a working parent, spouse or sibling, can improve the chances of loan approval. This is because with the combined income of the co-applicant, the EMI load gets divided.

• Avoid Multiple Loans:

Having too many loans increases chances of misconception. Banks always prefer to give loans to individuals who can handle their money wisely. Having too many outstanding loans gives the impression of a credit hungry person and banks may like to distance themselves from such people.

• Maintain A Low Credit Utilisation Ratio:

Keeping a credit utilising ratio to less than 30% can have a positive impression on lenders.

Conclusion

Fixed obligation to income ratio or FOIR is relevant for all types of loans. In secured loans the lenders can make up for their losses by taking over the collateral. But the collateral-free nature of unsecured loans results in high risk for lenders at times of a loan default.

Hence, the personal loan eligibility of an individual is highly dependent on FOIR as it indicates a candidate's disposable income that can be used to repay both the existing and new debts. On an average, the FOIR should be between 40% to 55%, meaning that the total monthly expenses should not exceed 50% of the total income. However, for specific lenders this can go up to 65% to 70% for a customer with a high net worth.

Are you looking for quick cash to fund your needs? If yes, approach IIFL Finance for a personal loan. In case you are worried about your loan approval because of a higher Fixed Obligations to Income Ratio than set by IIFL, apply jointly with an earning family member.

Still, for better loan terms you can always use the FOIR online calculator to determine your FOIR ratio.