FOIR: What is it & How to Calculate it on Personal Loans

It is standard practice for all financial institutions to have eligibility requirements for applicants to be considered for a loan. Among these are your financial standing, rating of creditworthiness, outstanding debts, job history, and other characteristics that determine your ability to repay debt. And this is where the FOIR calculation formula is relevant.

Fixed Obligation to Income Ratio, or FOIR, is a financial metric used by banks and other financial institutions to assess a borrower's creditworthiness. As the name suggests, the FOIR calculation compares the borrower's monthly income against their fixed commitments. Lenders use it to analyse a borrower's capacity to pay back the loan and the borrower's eligibility for one.

Financial institutions consider the income you make every month, payments on any existing debts, and possible EMIs of the proposed loan when calculating FOIR. Every lender verifies the borrower's ability to repay the loan on schedule and in equal monthly instalments before approving a loan. The FOIR computation for personal loans, therefore, has a significant impact on determining your loan eligibility. Ideally, your FOIR should ideally fall between 40% and 55%.

How is the FOIR calculation made for personal loans?

If a person's FOIR is 50%, the bank will not grant them a personal loan, house loan, auto loan, etc., until they have spent no more than 50% of their monthly earnings on living expenses. The bank will thus consider the balance of the applicant's income when determining the size of the loan they should be qualified for.

Step 1: Calculate Fixed Monthly Obligations

The borrower's fixed monthly commitments, such as rent, auto payments, credit card bills, and other debts, must be determined in instalments first to calculate the borrower's fixed monthly obligations. Add all of these.

Step 2: Determine the borrower’s Monthly Income

Find out the borrower's monthly income next. All regular revenue sources are included here, including salaries, company earnings, and any other sources.

Step 3: Determine FOIR

The borrower's set monthly obligations and income for the month may be found once you've calculated the FOIR. The following is the FOIR calculation formula:

= (Fixed Monthly Obligations / Monthly Income) x 100.

Example: An individual makes ₹50,000 per month in income. The person may contribute up to ₹25,000 towards their debts by classifying 50% as fixed commitments. The candidate is now making payments on a total of ₹11,000 for two loans with EMIs of ₹5,000 and ₹6,000 each. Therefore, the individual has ₹14,000 available to them. If this person applies for a personal loan, they will be eligible for an authorised loan amount of up to ₹14,000, subject to their remaining monthly discretionary income.

When applying for a personal loan or any other kind of loan, an applicant with a low FOIR is preferred. This is because a person with a high FOIR has less money available for discretionary spending after paying off their current EMIs. There is a good risk that if this individual receives another loan, he or she won't be able to make the EMI payment on the new loan. As a result, there will be a significant credit risk and a greater likelihood that banks may reject a loan application.

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Frequently Asked Questions

What is the meaning of FOIR in banking?

Fixed Obligation to Income Ratio, or FOIR, is a financial metric used by banks and other financial institutions to assess a borrower's creditworthiness. It is standard practice for all financial institutions to have eligibility requirements for applicants to be considered for a loan. And they use FOIR for that assessment.

What is the fixed obligation income ratio?

The formula for FOIR = (Fixed Monthly Obligations / Monthly Income) x 100. FOIR calculation compares the borrower's monthly income against their fixed commitments.

What is the full form of FOIR in microfinance?

The full form of FOIR is Fixed Obligation to Income Ratio.

What are examples of fixed obligations?

Predetermined financial or legal commitments that are difficult to modify are commonly known as "fixed obligations." These responsibilities consist of various duties, such as:

• Monthly payments are a necessary exchange between people or businesses and their landlords or lenders for renting or mortgaging property.
• Personal loans, auto payments, and school debt are all examples of fixed repayment obligations that must be fulfilled. Paying back a loan requires meeting these instalment requirements.
• Periodical payments made to an insurance provider for an insurance policy are known as insurance premiums. These sums are meant to cover the cost of various types of insurance, such as health, auto, and house insurance. Individuals and corporations alike are obligated to pay the government a variety of taxes, including income tax, sales tax, and property tax.