What is FOIR? How Is It Calculated?
Your capacity to repay a loan is the first and foremost thing which is considered when you apply for a personal loan or a housing or mortgage loan.
Banks and financial institutions follow strict eligibility criteria when it comes to approving a loan. Before they sanction a loan, every lender ensures that the borrower has the financial capacity to repay the borrowed loan timely in equated monthly instalments (EMIs).
They look into your personal credit history, income documents, current assets and liabilities and other financial details. They also determine your repayment ability by calculating the FOIR.
So, what is FOIR? The FOIR full form is fixed obligation to income ratio. It is a popular parameter that banks use to calculate the loan eligibility of the applicant. It is also referred to as debt-to-income ratio.
While calculating the FOIR, the banks and financial institutions take into account the applicant’s income and the instalments of all loans the applicant is still paying. It also considers the Equated Monthly Instalment (EMI) of the prospective loan which is under consideration.
FOIR vary from bank to bank and from case to case, but on average, it should be between 40% to 55%.
Let’s consider this example to understand FOIR better:
Suresh has an income of ₹ 28,000 per month; a TV loan instalment of ₹ 3, 000; another instalment of ₹ 5, 000 for a car loan; and a home loan instalment for ₹ 9, 000.
That is, he pays a total of ₹ 17,000 per month for all his active financial obligations.
Now, when he applies for MoneyTap’s credit line, he is REJECTED! He is confused because he has been approved for a loan three times earlier and has always paid his EMIs on time.
Let’s find out why Suresh’s application was rejected:
Essentially, all banks and financial institutions consider that you require up to 50% of your income for your living expenses. So, all your fixed monthly instalments including the EMI of the loan applied for should be restricted to 50% of your monthly income.
In the example above, Suresh spends his money every month paying these instalments:
- TV loan instalment of ₹ 3, 000
- Car loan instalment of ₹ 5, 000
- home loan instalment for ₹ 9, 000
Sum of all Existing Fixed Obligations = ₹ 17,000
Suresh’s Monthly Income = ₹ 28,000
Let’s find Suresh’s FOIR using this FOIR formula:
FOIR calculation= [Sum of Existing Fixed Obligations /Monthly Income] X 100
= 17,000/28,000 x 100
Suresh’s FOIR is more than 50%, hence his application for a credit line with MoneyTap was rejected.
The takeaway from this example
Through Suresh’s FOIR MoneyTap gauged that Suresh would have difficulty paying back all his EMIs since the FOIR is already over 50% of his current income.
But, Suresh need not worry! He can still reapply for MoneyTap’s personal line of credit, once he repays one of his previous loans or gets a salary hike at his job!
Why MoneyTap calculates FOIR?
MoneyTap’s credit line is an unsecured loan. That means we do not need collateral to give you the loan. So, to ensure that you have the financial capability to repay the borrowed loan, MoneyTap calculates the fixed obligations to income ratio to assess your personal loan eligibility.
How does the fixed obligation to income ratio affect your loan eligibility?
A lower FOIR means you have:
- fewer liabilities
- increased disposable income
- better repaying capacity
- higher chances of approval
What should I do if my fixed obligation to income ratio is high?
Apply for a loan with a co-applicant. You then have higher chances of loan approval. However, ensure that the co-applicant is working and is a spouse, parent or a sibling.
A Word of Advice
When you apply for any loan or credit from a bank, the bank sends an inquiry to the credit bureau. These inquiries get registered and are reflected in your credit report, thus affecting your credit score. If there are too many such inquiries, they may work against you by lowering your credit score. Hence, it is recommended that you calculate your FOIR before you apply for a loan.
A combination of a low FOIR and high credit score improves your chances for loan approval and allows you to bargain for a better loan interest rate.