All You Needed To Know About FOIR

Updated on: 7 September 2023

Published on: 18 October 2019

For lenders, offering loans can often be risky, especially unsecured loans. There is no surety that the borrower will repay the money lent. The risk may be even higher when banks and NBFCs carry out the credit functions by leveraging the deposits made by their customers. 

It is no wonder that lenders set strict criteria to assess the borrower’s repayment ability. Among these is the FOIR, or Fixed Obligation to Income Ratio, which significantly impacts your eligibility. 

To know the process of FOIR calculation, its meaning and importance, read on.

What is FOIR?

Fixed Obligation to Income Ratio or FOIR in banking helps determine your repaying capacity. Banks consider the repayment instalments of all your existing loans, other fixed expenses that you have and your income. 

By determining the total existing liability (including the EMI for the loan you applied for) and expenses you have against your income, lenders can easily assess your disposable income. Based on this, lenders calculate whether or not you will be able to pay another loan’s instalment. 

Statutory deductions such as taxes, PF, or insurance are not considered while calculating FOIR. However, your rent, bills and other such expenses are taken into consideration.

How Important is FOIR? 

Your eligibility for instant loan highly depends on your FOIR, meaning it can impact your access to financing. Generally, the FOIR requirement for any loan ranges from 40% to 55%. It can vary depending on the lender and the level of income too.

The lower the FOIR, the better it is. This is because it implies that a borrower has fewer expenses, a higher disposable income and a greater chance of paying the EMIs on time. As such, a low FOIR increases your chances of approval and vice versa.

How is FOIR Calculated for a Personal Loan?

The FOIR for personal loan is calculated by dividing the monthly financial obligation of the applicant by their net income and multiplying that by 100. As such, FOIR = (Debts + variable expense / Net monthly income) x 100

All existing loan EMIs, credit card bills, or any other fixed payments are taken into account. On the other hand, net income includes your monthly salary and income from other sources, such as rental property. With the given FOIR formula, lenders can easily calculate your lending capacity.

Also Read: Personal loan foreclosure charges

Example of FOIR Calculation

To better understand FOIR calculation, consider the following example. 

Let’s say X’s salary (in hand) is ₹50,000 per month. His monthly fixed obligation (such as rent, etc.) amounts to ₹20,000 and the EMI of the applied loan comes to ₹5,000 per month.

Using the above FOIR formula, his FOIR will be 50%. Here is a breakdown of it: 

FOIR = (₹20,000 + ₹5,000 / ₹50,000) X 100 = 50%

How Can FOIR Impact Loan Eligibility? 

As mentioned, FOIR calculation helps lenders gauge whether you can repay the loan on time. Given this, if your FOIR does not match the standard set by the lender, they may reject your application to decrease the risk of non-payment. Remember, a high FOIR ratio can result in rejection even if you have paid the EMIs of all the previous loans on time. 

What are the Ways in Which FOIR Can Be Reduced?

Lower FOIR improves your chances of getting a better offer on your personal loan. Here are a few ways you can reduce your FOIR:

• Ask for a raise or take freelancing assignments to increase your income
• Lower your existing debit by closing other loans
• Control unnecessary expenses to lower your fixed obligations
• Restructure your loans to reduce your existing EMIs 
• Apply for a loan with a longer tenure and a lower EMI
• Apply for a joint loan to reduce the EMI burden

Looking for a Loan But Worried About the Hassle? 

Banks and other large financial institutions have plenty of legal and other obligations. As such, you need to follow rigorous processes to get a loan. This can take up a lot of time and can become stressful. However, lenders like Fibe, who have simple and quick processes, help those who have too much to do in too little time. 

With the entirely digital processes carried out via a personal loan app, the hassle of collecting and submitting considerable paperwork is eliminated. Fibe also offers a truly customer-centric service to ensure your borrowing experience is worry-free. 

You can get an instant Personal Loan of up to ₹5 lakhs at affordable interest rates. With lower borrowing costs and a flexible tenure, you can get hassle-free funding instantly. Moreover, Fibe uses alternate credit scoring mechanisms to assess your creditworthiness, making loans even more accessible. To get started, download the Fibe Personal Loan App or register on the website. 

FAQs on FOIR 

What is a good obligation ratio?

Ideally, a FOIR under 40% can help boost the approval chances for an affordable loan.

What is the FOIR calculation formula with an example?

The formula for FOIR is: FOIR = (Total debts + Total expense / Net monthly income) x 100

Consider a net income of ₹90,000. If the EMI, including the one for the loan applied for, amounts to ₹30,000 and other expenses are ₹10,000, then FOIR = (₹30,000 + ₹10,000 / ₹90,000) X 100 = 44.4%. You can also carry out the FOIR calculation in Excel by mapping out the formula accordingly.

What is FOIR in personal loans?

For personal loans, FOIR meaning refers to the ratio of your total fixed expenses (including EMI payments) against your income. Banks and lenders use FOIR to calculate your dispensable income with your existing financial obligation (including the prospective loan you apply for) to understand if you can repay future loans.

Do all banks have a standard FOIR?

While there is no set standard parameter for FOIR, banks usually prefer if you have a ratio that is less than 50%. 

How do you calculate the obligation ratio?

To calculate FOIR, take all your fixed obligations and divide them by your income. Then, multiply the result by 100. Financial obligation is a sum of all your debts (including the prospective EMI of the loan you apply for) and other expenses. However, investments, PFs, taxes and other such expenses are not included.

What should I do if my FOIR is high?

If you have a high FOIR, you can either increase your net income or reduce your debts. Alternatively, you can adjust your loan application to lower your EMI or make a joint application to reduce the EMI burden.