What is FOIR? How to calculate it?

Loans, debts and everything credit! There are thousands of loans and credit facilities available for people like you and me that we can avail. But at the same time, customers like us are screened under many factors. 

Screened, as in, our eligibility criteria is checked before granting us loans. And this is done with the help of various ratios and scores, and today, we are going to discuss one such ratio, which is the Fixed Obligation to Income Ratio.  

So, let’s get started.

What is FOIR? 

Financial institutions are advised to follow strict eligibility criteria before granting loans because the ability to repay the loan is the most critical factor on which the loan giving process depends. 

If the individual cannot repay the loan, it will add to the NPA in bank financials. Thus, to eliminate this, banks & financial institutions follow strict guidelines to check the eligibility criteria for granting loans. 

The eligibility criteria may include background checks, income records, financial responsibility, credit repayment records and more.

This checklist is long but is solely based on the individual’s capacity to pay back the loan. 

Specifically, banks go through individuals' income documents, personal credit history, current assets & liabilities and other financial details.

Based on this information, there are three ratios that a lender will consider to calculate eligibility, namely:

1. Fixed Obligation to Income Ratio

2. Loan to Value (LTV) Ratio

3. Instalment Income Ratio

Where, for sanctioning a personal loan and other unsecured loans, banks consider FOIR. 

Fixed obligation to income ratio or FOIR is a metric used by financial institutions such as banks to assess the creditworthiness of a loan applicant and whether the applicant will be able to repay the EMI and principal amount in due time or not. 

But how is it done? It is calculated by taking your fixed monthly expenses as a percentage of your net monthly income (in simple words, income - expenses). This indicates your disposable income (savings). Then it is judged whether or not this disposable income will be sufficient for loan repayments. 

Ideally, FOIR must be between 40% to 50% which implies your monthly expenses should not exceed 50% of your income; the lesser the FOIR ratio, the better it is. 

Though, for high net worth individuals, the FOIR ratio can go up to 60% to 70%. Curious to find out what your FOIR ratio will be? Let’s take a look at that in our next segment. 

How to calculate FOIR for a Personal Loan?

So, now we know that the FOIR ratio is nothing but the percentage of your expenses over your income. But, formally, the formula to calculate it is- 

Total fixed monthly obligations/ Net monthly salary * 100

The fixed monthly obligation includes:

• Existing EMI

• Credit card payments

• Rent payments

• Living expenses

• Other debt obligations

The contribution towards fixed or recurring deposits and taxes payable shall not be considered fixed monthly obligations. 

Let's understand this clearly with an example. Suppose your monthly salary is ₹50,000 and your expenses include, EMI of  ₹10,000, Credit card payment of ₹ 5,000 & other expenses of ₹ 10,000. Thus, the total monthly obligation of ₹25,000.

According to the formula,

FOIR = (25000/50000) * 100

i.e. 50%. 

As we discussed earlier, the lesser the FOIR, the better it is. Anything you do to reduce your FOIR will give you better chances for applying for a personal loan. There are various ways by which you can reduce your FOIR, which we have discussed below. 

Ways to reduce FOIR

There are various methods to reduce Fixed Obligation to Income Ratio -

Maintain a low credit utilisation ratio:

The credit utilisation ratio is the amount of credit you are currently using upon the total amount of available credit. That is, it calculates the maximum amount of credit you can utilise. You have to maintain a credit utilisation ratio of under 30% before applying for a personal loan. Your loan application might get rejected if your credit utilisation ratio is consistently high.  

Timely repayments of debt:

Maintaining a healthy credit history can do wonders for you. And you can do this by paying your monthly EMI’s, credit card payments and more such debts you have taken. 

Avoid multiple loans:

Taking all kinds of loans all at once can sabotage your chances of getting another loan. Thus, to keep your FOIR under control, you should avoid taking multiple loans.

Joint loan:

Applying for a personal loan with a co-applicant will increase your chances of getting a personal loan easily. Co-applicant is ideally a working family member. This not only increases the chances of loan approvals but also reduces the burden of EMI as it is divided among the applicants. 

Job switches have to be avoided:

Switching multiple jobs over a short period can reduce your chances of getting a personal loan. Thus, this should also be avoided. 

Importance of FOIR

This is a critical ratio for banks to check an applicant's loan eligibility. And for an applicant, it is essential to keep this ratio in control. This was all about loans & credit. But it is also very essential to know that excessive loans & debt are a trap, and one should either restrain from availing of them or manage them properly. 

We at Finology have sorted the idea of managing loans for you with Finology Recipe, where you can manage your EMIs better and formulate a financial plan for yourself. 

Finology Recipe is your perfect companion for financial planning of any kind. Where you can understand your financial position in just 5 minutes, understand your financial appetite better, Plan your goals better, get your financial X-Ray, even get stock and mutual fund recommendations and a lot more. 

With Recipe, create a bulletproof investment plan that understands you and adjusts with you because #itsClever.

The Bottom Line

There are various ratios that are taken into consideration before a financial institution can provide a loan to you, and FOIR is one such ratio. 

As we said earlier, you can plan & manage your finances better with Recipe. Tell us in the comment section if there is any other concept you want to learn. Also, whether you liked the blog or not. 

You can also mail us at support@finology.in. Until then, happy investing & happy learning.