What Is FOIR? Meaning, Formula & How It Affects Loan Eligibility

When you apply, lenders do not just look at your income and credit score; they look for more details. They also want to understand how much of a financial obligation you have, whether your income is already committed to any financial obligation or not. That is where your FOIR, or fixed obligation to income, comes into the picture. FOIR checks how much of your monthly income is a fixed financial obligation, such as EMI, which is fixed. Understand that lenders needs to consider this ratio to understand whether you can comfortably manage to repay the loan back on time or not. A low Fixed Obligation to Income Ratio means that more of your income is available to take onto another financial obligation.

In this guide, we’ll explain what FOIR means, how to calculate that, what’s included in that and how it affects your eligibility. 

What Is FOIR?

FOIR stands for Fixed Obligation to Income Ratio. It is the percentage that shows how much of your monthly income is already committed to a fixed financial obligation, such as existing loan EMIs. Lenders use Fixed Obligation to Income Ratio as one of the factors that checks your repayment capacity. If a large part of your income is already going towards any of the financial obligations, it tells you that you might not be capable of repaying the loan, or taking a loan is going to put pressure on your monthly budget.

For example, If you earn 50,000 monthly and 15,000 is your monthly obligation, then this would be 30%, meaning this part of your income is already committed to a financial obligation. However, it is not the only factor that determines whether your loan will be approved or not. Lender will also assess your income, credit history, existing debts and employment and income stability, loan amount and eligibility criteria, which might vary from lender to lender.

How Is FOIR Calculated?

There is a formula used to calculate FOIR.

• Fixed Obligation to Income Ratio = (Total Fixed Monthly Obligations / Monthly Income) x 100
• For example, assume your monthly income is ₹ 60,000 and your existing fixed monthly commitment is ₹ 18,000.
• Fixed Obligation to Income Ratio = ( 18,000 ÷ 60,000 ) × 100

So your Foir is 30%.

A lower Fixed Obligation to Income Ratio means you have lesser amounts of your income already designated for existing debt obligations and more cash flow for other expenses and possibly future loan payments.

What is the FOIR Part of?

The obligations considered in FOIR will differ between lenders and their specific assessment process. This could be a combination of existing loan EMIs and other regular financial commitments that the lenders might find relevant.

For example, if you already have taken a personal loan, car loan, or any other credit facilities with regular payments, this means that you have already ongoing financial responsibility on you, so this will help them to assess your repayment capacity. It’s important for you to remember that the exact calculation for this can differ between lenders. Some lenders might also consider your other income and obligations; this is based on their internal policies. 

What Is a Good FOIR for a Personal Loan?

There isn’t any specific FOIR percentage that guarantees a personal loan for approval. Different lenders can have different eligibility criteria depending on the loan product, borrow profile, income, and other factors. 

In general, a low Fixed Obligation to Income Ratio percentage indicates that even after these fixed expenses you can save a greater portion of your money. On the other hand, a higher FOIR will indicate that a great part of your money is already committed to other repayment. So, instead of just focusing on a particular percentage, it will be better to look at FOIR as one part of your overall financial profile.

How Does FOIR Affect Loan Eligibility?

FOIR will help the lenders to assess your capacity to repay the loan. If you already have some financial commitments that will make you less capable of being able to pay the bill back on time, resulting in more burden instead of solving the problem. So this is usually a security check for the lender to carefully make a decision on whether to lend you money or not. Depending upon its eligibility criteria, this can have an impact on the loan amount, terms, or approval decision.

For example, two people may have the same monthly income, but their FOIRs are different, so according to that, the repayment capacity might be assessed differently.

How FOIR affects your loan eligibility

Let’s say we have two borrowers, both earning ₹50,000 a month.

• Borrower 1: Existing monthly liabilities ₹10,000
• Borrower 2: Current monthly commitments = ₹25,000

Hence their Fixed Obligation to Income Ratio’s are like this:

• Borrower A = Rs. 50,000 Rs. 10,000 x 100 = 20%
• Borrower B = (₹50,000/₹25,000) * 100 = 200 per cent

They both make the same salary. However, Borrower B spends a much higher percentage of income on existing financial obligations. So lenders might assess both the applications differently in terms of their repayment capacity and other factors.

How Can You Improve Your FOIR?

There are few ways in which you can remove your financial obligation with time:

1. Reduce your existing debt: Paying back your outstanding loan will reduce your monthly obligation. 
2. Avoid taking an unnecessary loan: Avoid taking a loan if it doesn’t feel necessary, this additional credit will just increase your monthly commitments
3. Always choose a manageable loan amount: Borrow only an amount when you realize it fits your budget.

The main goal shouldn’t simply be to achieve a particular FOIR percentage but to make sure that your repayment remains manageable within your income.

Frequently Asked Questions About Fixed Obligation to Income Ratio