Before approving a loan, all financial institutions, including banks, follow strict eligibility checks. They assess factors like income proof, existing debts, credit history, and assets to ensure the borrower can repay. A key metric used is the Fixed Obligation to Income Ratio (FOIR)—which compares a person’s monthly debt obligations to their income. If a borrower’s FOIR is too high, approval chances decrease, as it signals financial strain. These thorough checks help banks minimize risks and prevent loan defaults.
Before granting individual loans, a bank considers several variables FOIR is one of them. In this blog, we will discover the FOIR full form, meaning, FOIR calculation, and others. Continue reading to discover all.
What is FOIR?
Banks and other financial institutions utilize the metric called FOIR; FOIR full form is Fixed Obligation to Income Ratio used to determine an individual's debt eligibility. The computation of FOIR involves evaluating specific monthly expenditures and legal deductions, including professional taxes, investment deductions, and provident fund contributions. A FOIR shows a candidate's available income that they can use to pay back both new and existing loans. On the other hand, the obligations, including rent, can be considered fixed obligations based on income. Consequently, a person's debt is significantly impacted by their financial situation.
How is FOIR calculated?
Here are the steps for FOIR calculation:
Step 1: List down your fixed monthly expenditure
List all of the monthly fixed payments you make. These consist of monthly rent payments, credit card payments, and loan payments (such as home loans, auto loans, and personal loans).
Step 2: Evaluate your monthly income
Calculate your total monthly income, which may include payroll or salaries as well as any other source of funds from a side business or renting.
Step 3: FOIR Calculation
Apply the following formula: FOIR = (Total Fixed Monthly Obligations/Total Monthly Income)×100. For instance, Your FOIR would be FOIR=(2000/5000)×100=40 if your monthly income was ₹5,000 and your total fixed monthly liabilities were ₹2,000. This indicates that your fixed obligations take up 40% of your monthly revenue.
Why is FOIR Calculation Important?
The following are some significant reasons for calculating FOIR:
While determining whether to approve your loan application, lenders employ FOIR. A high FOIR indicates that you have insufficient income to cover further debts, which may make lenders reluctant to provide you with more credit.
Understanding your financial health is aided by knowing your FOIR. After paying your monthly bills, a lower FOIR indicates that you have enough money to cover expenses.
You can handle your debt more effectively if you have a better understanding of your FOIR.
How does FOIR impact the approval of a personal loan?
Lenders use FOIR to determine your ability to handle additional loans when you apply for a personal loan. A lower FOIR indicates that you have enough money left after paying off your current debts to take out new loans. Lenders often want a FOIR below 50%. A high FOIR could result in the denial of your loan application.
What are the Top Ways to Reduce FOIR?
Here are a few strategies to reduce your FOIR:
Boost your income: To earn extra cash, do a side business or freelancing. Additionally, you might search for investment options that generate consistent income, such as dividends or rental income.
Repay current debts: Any additional funds you receive as a bonus or savings can be used to settle some of your debt. For a low interest rate and cheap monthly payment, combine multiple loans. Loans with the highest interest rates should be paid back as soon as possible to lower your overall debt.
Refinancing loan: You can refinance your loan to ensure low interest rates, which will minimize the monthly payment. Increasing the duration of your loan is an additional strategy to lower your monthly payment.
Steer clear of new debts: Avoid additional loans until your debt is reduced and easier to handle. Reduce the number of credit cards you use to prevent your monthly spending from rising.
Final Thoughts,
Now you know FOIR's full form, meaning, and FOIR calculation. There is more to FOIR than just a financial term. It represents prudence and financial responsibility. It serves as an indicator of your capacity for efficient debt management and repayment.
When applying for a personal loan, it is essential to comprehend FOIR. It has an effect on both your eligibility and the conditions of the loan that is being offered to you. Therefore, you should be aware of your FOIR if you wish to maintain your financial situation and improve your chances of getting a loan approved.
