What Is Meant By FOIR? What Is Its Impact On Personal Loan Approval?

Last Updated: 14 Oct 2024

FOIR or Fixed Obligation to Income Ratio is the ratio of fixed monthly payments that an individual has to make and her monthly income. A higher FOIR means you may find it more difficult to make the payments of the new loan that you are applying for. A lower FOIR means that you can more easily make the payments of the new loan that you are applying for. A lower FOIR is therefore better if you are applying for a new loan.

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What Is FOIR?

The full form of FOIR is Fixed Obligation to Income Ratio and is a finacial metric by which the creditworthiness of the applicant for various loans, including home loans, personal loans, and other forms of credit, is judged.

The FOIR is expressed in the form of percentage and facilitates lenders in determining whether an individual has the ability to manage the additional debt burden of a new loan. A lower FOIR represents a lower level of existing financial commitments relative to income, which generally increases the chances of loan approval.

Lenders usually fix a maximum FOIR limit to for mitigating the default risk. Although the limit generally varies among lenders, it is around 40-50%, highlighting that the fixed obligations of the borrower must not exceed 40-50% of their total monthly income.

How Is The Calculation Of FOIR Done?

The calculation of the Fixed Obligation to Income Ratio (FOIR) is done by determining the ratio between the fixed monthly income of the borrower and fixed obligations. Here’s a guide on how FOIR is calculated:

• Determining Fixed Obligations:

  The calculation begins by considering the fixed obligations of the borrower, including bills of credit card, repayment of existing loans, and EMIs, among any other recurring commitments of finance.

• Calculation Of Total Fixed Obligations:

  Once all the fixed obligations are identified, they are added up to find out the total fixed obligation of the borrower.

• Ensuring The Monthly Income:

  In the next step, the monthly income of the borrower is taken into account. This may include wage, salary, income from a business, income from rent, or any other regular income sources that are typically received every month.

• Calculating FOIR:

  The FOIR is determined by dividing the total fixed obligation by the total income per month. To find out the percentage, the result is multiplied by 100.

  Therefore the formula to calculate FOIR is as follows:

  FOIR = (Total Fixed Obligations / Income per month) x 100

  For instance, if a borrower has total fixed obligations of ₹40,000 per month and a monthly income of ₹90,000, the FOIR would be calculated as follows

  FOIR = (40,000 / 90,000) x 100 = 44.44% Therefore the FOIR will be 44.44%

How Does FOIR Affect Personal Loan Approval?

FOIR (Fixed Obligation to Income Ratio) plays a crucial role in the personal loan approval process. It is considered to be a key factor while determining the creditworthiness of a borrower. FOIR impacts the approval procedure of personal loans in the following manner:

• It impacts loan eligibility by assessing whether the existing fixed obligations are within the manageable range according to their monthly income.
• It also determines the borrower’s capacity for repayment. The lower the FOIR, the higher would be the repayment capacity entertained by the borrower. This will have a great impact on the approval of the loan.
• It helps the lender to assess the potential risk involved in lending a considerable amount to the borrower.
• FOIR also impacts the maximum amount of loan that the lender is willing to provide.

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Conclusion:

Therefore by considering the FOIR, lenders are able to assess the ability of the borrower to maintain a healthy financial position, meet their monthly repayment obligations, and avoid financial over-extension. Thus, it is crucial for borrowers to know about the FOIR concept and ensure that it is within the acceptable range for improving their loan approval chances and ensuring sound financial management.