What is the Meaning of FOIR in Banking & How it is Calculated

Posted on Monday, February 12th, 2024 | By IndusInd Bank

Financial institutions like banks have specific eligibility criteria that must be fulfilled to avail personal loan. One important factor considered is the Fixed Obligation to Income Ratio, commonly referred to as FOIR.

FOIR plays a key role in determining how much loan amount an individual can afford to repay based on their income level. This article will discuss what FOIR means, how it is calculated, and its significance when applying for a personal loan.

Understanding FOIR

FOIR’s full form is Fixed Obligation to Income Ratio. It is a metric used by lenders to evaluate an applicant’s personal loan repayment capacity. FOIR indicates what percentage of the applicant’s monthly income is already committed towards existing obligations like rent, repayments for existing loans, credit card dues, insurance premiums, etc. The lower the FOIR, the more disposable income is left for the individual to take on additional loan repayment burden without hassle. Generally, banks do not approve loans if a person’s FOIR exceeds 50%. This leaves at least half of their monthly pay uncommitted, ensuring easy loan repayment.

Calculating FOIR

The formula to calculate FOIR is:

Fixed obligations include monthly rent, existing loan EMIs, insurance premiums, minimum amount due on credit card(s), and utility bills. Gross monthly income refers to the total salary before any deductions like taxes, provident fund contributions etc.

For example, if an applicant’s total fixed obligations are Rs. 20,000 and gross monthly income is Rs.40,000, their FOIR will be 20,000/40,000 = 50%

Significance of low FOIR

A lower FOIR means the individual has sufficient surplus income each month to take on additional debt repayment without cash flow issues. This shows stronger loan-paying capability. Banks prefer lending to applicants with a low FOIR as it indicates the existing debt obligations don’t consume a lot of their earnings, leaving a comfortable repayment buffer.

Factors impacting FOIR

FOIR is impacted by changes in either fixed expenses or income. Key points to note are below.

• Taking on additional debt/EMIs like a car loan will increase fixed expenses and FOIR
• Loss of job/income or pay cuts will raise FOIR if expenses are not simultaneously reduced
• FOIR can come down by pre-paying high-interest debt to lower total outgo
• Rent reduction, insurance plan change, etc., can optimise fixed costs and lower FOIR

Maintaining a FOIR under 50% enhances eligibility for loans and helps secure maximum sanction from banks. Let’s understand some ways this ratio can be optimized.

Reducing FOIR for better loan approval chances

To borrow more at lower interest rates, applicants must focus on bringing their FOIR down. Some effective methods are:

• Requesting a co-applicant to share the loan burden and bring down individual FOIR
• Maintaining a clean repayment track record to build creditworthiness over time
• Keeping credit card usage low to decrease total debt obligations
• Streamlining finances and reducing unnecessary expenses
• Refinancing existing high-cost loans to lower monthly obligations
• Providing all proof for all income sources to show true repayment ability

Conclusion

A low FOIR demonstrates stronger repayment capacity and increases eligibility for instant personal loans. Proper financial management can help optimise one’s FOIR over time. This enhances approval chances for personal loans from banks. Individuals can benefit from regularly monitoring their FOIR to maximise their chances of securing a personal loan. Keeping FOIR minimal through financial discipline serves as a pivotal factor for a smoother personal loan approval process.

IndusInd Bank offers instant personal loans that have a simple and quick application process that is 100% digital. You can choose a flexible repayment tenure between 1 to 4 years at attractive interest rates and get an amount as high as ₹5 lakh.

Apply now!

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.