Fixed Obligation-to-Income Ratio or FOIR is a measurement that lenders use to determine the amount of your earnings used to pay fixed obligations. This is particularly helpful for lenders looking for loan applications to approve. Let’s dive deeper into the meaning of FOIR and the calculation it uses to calculate a private loan.
What is FOIR?
FOIR, also known as the Fixed obligation ratio frequently utilized by lenders as a crucial measure when evaluating an application for a loan. The principal obligation component, in this case, is EMI or an equated monthly installment. It determines how much your earnings are used to pay EMIs and other installments. The higher the ratio, the more your income is used to pay EMIs. Lenders view a high FOIR as a sign of inability to repay any additional debt.
How is FOIR Calculated for a Personal Loan?
The formula for calculating FOIR is as simple as the formula as follows:
(Fixed obligations/Income) *100
The fixed obligation is a term used to describe the EMIs paid by credit cards and rental, living expenses, and so on. These expenses will be divided in half by total gross income and then multiplied by 100.
Note FOIR does not count tax deductions or contributions to regular and fixed deposits as part of commitments to pay.
FOIR calculation using an example
Let’s say that the monthly earnings of the applicant are at least Rs. 80,000. Their monthly financial obligation is Rs.10,000, auto credit EMI of Rs.8000, and living expenses of Rs. 15,000. The calculation of their FOIR will be as follows:
(10,000+8,000+15,000)/80,000 * 100 = approximately 41.25%
This implies that 41.25 percent of the earnings are used to pay fixed obligations, while the remainder is available for future loan repayments.
Impact of FOIR on a Personal Loan Approval
- The value of FOIR that lenders consider acceptable ranges from 40-55 percent. The optimal value may be different for people with high net worth.
- The lower your ratio, the more significant amount of disposable income you’ve got in your pocket. The odds of getting a loan are more critical in this scenario.
- The higher the ratio, the greater the fixed obligations you must meet. That means your income could not be sufficient to cover a loan. The chances of rejection are high in this scenario.
Ways to Reduce FOIR
- Make an application for joint loans. A joint loan implies that the applicants share the financial responsibility. This means that it lowers the amount of your fixed obligation to that amount.
- Maintain a good credit history – Make sure to pay the bills on time, and pay your debts. This will help maintain the ratio of your credit utilization to be lower and helps keep a solid credit history. Healthy exercise can eventually aid in maintaining a healthy FOIR.
- Avoid taking out multiple loans. Multiple loans can give the impression of needing help to handle your financial commitments. This can be perceived as a need for more ability to manage your finances effectively.
- Refrain from making frequent shifts. Some lenders might view many job changes are unstable for job security. This might not work effectively when approving a loan.
Conclusion
FOIR, also known as the Fixed obligation ratio (FOIR), is a crucial measure that lenders consider when considering personal loans. It measures how much of an applicant’s income is currently the payment of fixed obligations, including EMIs rent, EMIs, or living expenses. The higher the ratio, the less you can repay any additional loans. Keep your FOIR in the 40 to 55 percent range to stand a better chance of getting loan approval.
