When you apply for a loan, lenders check if you can repay it. One key way they do this is by looking at your Fixed Obligation to Income Ratio (FOIR). It's important to understand FOIR for any type of loan, whether it’s for a home, personal use, or a car. Let’s look at this in more detail.
The Fixed Obligation to Income Ratio (FOIR) is an important number that banks use to see if you can get a loan. It shows how much of your income goes toward paying fixed expenses, like monthly loan payments (EMIs), other loans, credit card bills, and similar costs.
In simple terms, FOIR shows how much of your monthly income is used to pay off debts. A lower FOIR means you have more money left for a new loan, while a higher FOIR means a big part of your income is already spent on payments. This makes it riskier for lenders to give you a loan.
Income: The total monthly income of an individual or household.
Fixed Obligations: Any recurring debt payments, such as loan EMIs, credit card bills, or rent.
Loan Eligibility: FOIR helps lenders determine whether you can take on more debt based on your income and obligations.
FOIR is very important in deciding if you can get a loan. When you apply, lenders want to see if you have enough income left after paying your fixed costs to repay the new loan. This helps lower the risk of not being able to pay back the loan, protecting both you and the lender.
A low FOIR is good because it means you have enough extra income to handle more debt easily. In comparison, a high FOIR leads to your loan application being rejected or getting less favorable terms, like a higher interest rate or a shorter loan period.
Calculating your Fixed Obligation to Income Ratio (FOIR) is relatively straightforward. The formula is as follows:
Where:
Fixed Obligations: This includes all of your current EMIs (for personal loans, car loans, home loans, etc.), credit card dues, and any other fixed monthly payments.
Net Monthly Income: Your income after taxes and deductions.
List Your Fixed Obligations:
Write down all your monthly payments, like loans, EMIs, credit card bills, and any other regular costs.
Calculate Your Net Monthly Income:
This is the money you take home after taxes and deductions. If you run your own business, it’s your monthly income after expenses.
Apply the FOIR Formula:
To calculate your FOIR, divide your total monthly obligations by your net monthly income and then multiply by 100.
Let’s say your net monthly income is ₹1,00,000, and your fixed obligations (including loan EMIs and credit card bills) add up to ₹40,000.
FOIR = ( ₹1,00,000 / ₹40,000 ) × 100 = 40%
In this case, your FOIR is 40%, meaning that 40% of your monthly income goes towards servicing your fixed obligations.
An ideal FOIR is usually between 40% and 50%. Most lenders think this is a good amount of your income to use for paying debts while still having enough left for living costs and other spending.
| FOIR Range | Loan Approval Likelihood | What It Means |
|---|---|---|
| Below 40% | High | Low risk; you have enough disposable income |
| 40% - 50% | Moderate | You may still get approved but with conditions |
| Above 50% | Low | High risk; you may struggle to get approval |
Various factors can impact your FOIR and ultimately influence your loan eligibility. Here are some of the most important ones:
Income:
Higher-income usually means a lower FOIR because you have more money left after paying your fixed costs. For people with lower incomes, even small loans or credit card bills can raise their FOIR a lot.
Number of Existing Loans:
Having more loans increases your fixed payments, which can raise your FOIR. Paying off some loans before applying for a new one can help improve your FOIR.
Loan Tenure:
A longer loan term usually means smaller monthly payments (EMIs), which can lower your FOIR. Choosing longer repayment periods for new loans can help keep your FOIR favorable.
Interest Rates:
Higher interest rates mean higher monthly payments, which can increase your FOIR. Getting loans with lower interest rates can help lower your payments.
Credit Card Usage:
If you carry a balance on your credit card each month, it increases your fixed costs and raises your FOIR. Paying off your credit card in full every month can help keep your FOIR lower.
A high FOIR can limit your loan options or lead to worse terms. However, there are ways to lower your FOIR and improve your chances of getting a loan:
Pay Off Existing Loans:
Try to pay off one or more of your current loans before applying for a new one. This will lower your fixed payments and reduce your FOIR.
Opt for a Longer Loan Tenure:
Choosing a longer loan term means smaller monthly payments (EMIs), which can lower your FOIR. Just keep in mind that you’ll pay more interest over time.
Increase Your Income:
If you earn more money, your FOIR will go down because your fixed costs stay the same while your available income increases. Look for side jobs, bonuses, or promotions to boost your income.
Refinance Existing Loans:
If you have loans with high interest rates, consider refinancing them to a lower rate. This can lower your monthly payments and reduce your FOIR.
Lenders use FOIR to see if you can repay a loan without putting yourself in a tough financial spot. A high FOIR means you might already have too many financial burdens, which increases the chance you could miss payments on a new loan. A low FOIR, however, shows that you have enough extra money left after paying your current debts.
Risk Mitigation: Lenders want to reduce the chance of people not being able to repay their loans. A low FOIR means the borrower is in good financial shape.
Debt Management: A manageable FOIR shows that borrowers can handle their payments without getting overwhelmed.
Loan Sizing: FOIR helps lenders decide how much money they can safely lend. If your FOIR is too high, they might offer you a smaller loan than you wanted.
Understanding the Fixed Obligation to Income Ratio (FOIR) is important for anyone who wants to manage their money well, especially when applying for loans. FOIR shows how much of your income goes to fixed payments, which helps lenders see if you can repay a loan. By calculating your FOIR, you can make smart choices about borrowing and keeping your finances balanced. Keeping your FOIR in a safe range improves your chances of getting a loan and helps you stay financially stable, allowing you to reach your goals without too much stress.
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FOIR stands for Fixed Obligation to Income Ratio. It measures the percentage of your monthly income that goes toward fixed obligations like loan repayments and other fixed expenses.
FOIR is calculated by dividing your total fixed obligations by your net monthly income and multiplying the result by 100. The formula is FOIR = (Total Fixed Obligations / Net Monthly Income) × 100.
FOIR helps lenders evaluate your ability to repay loans. A lower FOIR indicates better financial health and a higher capacity to take on additional debt.
Fixed obligations include regular payments such as home loans, car loans, personal loans, and any other consistent monthly liabilities.
A FOIR of 40% or below is generally considered healthy, while a FOIR above 40% may signal potential financial strain and could affect loan eligibility.
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