Banks and lenders have several internal variables that check eligibility with each loan request. When you borrow a loan, banks look for your repayment capacity. One such key parameter they will check is your Fixed Obligation to Income Ratio or its FOIR. It is one of the factors that lenders check to ascertain a pretty clear answer about how much of your income is already going on existing expenses. Therefore from that they may determine the amount of your income that you can spare towards a new loan repayment.
FOIR: What is it?
The Fixed Obligation to Income Ratio is known as FOIR.
The proportion of income allocated to fixed monthly obligations in the context of this ratio is expressed as a percentage.
Before assigning a loan, FOIR is an important factor for any bank to ascertain the borrower’s capability of repaying a loan.
A lower FOIR means you have more disposable income, increasing loan eligibility.
Key Components Considered in FOIR Calculation:
- Loan EMIs (personal, home, car loans, etc.)
- Rent payments (if applicable)
- Insurance premiums
- Other fixed obligations (credit card bills, overdrafts, etc.)
What FOIR Does Not Include:
- Provident Fund (PF) contributions
- Investment Deductions
- Professional Tax
How is FOIR Calculated?
Formula:
FOIR is equal to the quotient of total fixed monthly obligations upon gross monthly income multiplied by one hundred.
Example:
Monthly Income: ₹1,20,000
Loan EMI: ₹30,000
Rent: ₹10,000
Insurance Premium: ₹5,000
Total Fixed Obligations = 30,000 + 10,000 + 5,000 = ₹45,000
FOIR = (₹45,000 ÷ ₹1,20,000) × 100 = 37.5%
This example represents that 37.5% of the person’s income is spent on fixed expenses. The rest is available to repay a loan.
FOIR Benchmarks for Loan Approval
Lenders categorize FOIR into different ranges to assess risk:
Low FOIR (<40%): Excellent loan approval chances. Indicates financial stability.
Standard FOIR (40%-50%): Acceptable to most lenders. Balanced financial profile.
High FOIR (>50%): High debt burden. Lower chances of loan approval.
Why is FOIR Important?
FOIR is critical for both borrowers and lenders:
For Borrowers:
Helps understand personal finances.
Improves loan eligibility by managing obligations.
Prevents over-borrowing and financial stress.
For Lenders:
Figure out an applicant’s ability to repay loans.
Reduces risk of defaults.
Determines maximum loan amount eligibility.
How to Reduce FOIR for Better Loan Approval
If your FOIR is high, you can take steps to lower it:
Pay Off Smaller Loans
Clear short-term debts like credit card dues or small loans.
Reduces monthly fixed obligations, lowering FOIR.
Increase Income
Take up freelance work or side gigs.
Higher earnings improve disposable income.
Opt for Longer Loan Tenure
Extending repayment tenure reduces EMI amounts.
Helps in lowering the FOIR percentage.
Consolidate Debts
Merge multiple loans into one with lower interest rates.
Helps manage repayments efficiently.
Avoid New Credit Applications
- Taking multiple loans at once increases financial burden.
- Focus on repaying existing debts first.
- Apply with a Co-Applicant
- Adding a co-applicant (spouse, parent, sibling) increases total income.
- Banks consider combined income, improving approval chances.
Real-Life Example: FOIR and Loan Approval
Case 1: Low FOIR (30%) – Approved Loan
Umesh earns ₹1,50,000 per month.
His fixed obligations (EMI + Rent) = ₹45,000.
FOIR = (₹45,000 ÷ ₹1,50,000) × 100 = 30%.
Since the FOIR is below 40%, the bank approves his loan.
Case 2: High FOIR (55%) – Loan Rejected
Sunita earns ₹80,000 per month.
Her fixed obligations (EMI + Rent) = ₹44,000.
FOIR = (₹44,000 ÷ ₹80,000) × 100 = 55%.
Since FOIR is above 50%, the bank rejects her loan.
She can improve her approval chances by clearing small debts or increasing her income.
Conclusion
Understanding FOIR is crucial for managing personal finances and improving loan eligibility. If your FOIR is too high, consider reducing obligations or increasing income before applying for a loan. A well-maintained FOIR ensures financial stability and better borrowing opportunities.
Would you like help to calculate your FOIR or improve your loan eligibility? Let us know in the comments!