What is FOIR (Fixed Obligations
to Income Ratio) and How
is It Calculated?

What is FOIR?

Let us start by understanding what FOIR is. The full form of FOIR is ‘Fixed obligations to income ratio. ’ It is the most commonly used parameter by lenders to determine the loan eligibility of an applicant. In simpler words, it is the debt-to-income ratio. Lenders analyse the financial history of potential loan borrowers in order to check whether they will be able to repay it or not.

On average, FOIR should be between the range of 40% to 50%. Borrowers’ capacity to repay loans is the most important basis of consideration for a personal loan. There are eligibility criteria to be met when it comes to approving loans. Lenders have to ensure that borrowers have the financial capacity to repay the borrowed loan in time as per committed equated monthly instalments (EMIs).

Thus, an applicant’s FOIR becomes the cornerstone of deciding whether to process a loan application. Lower FOIR means that the applicant’s net monthly obligations are significantly lower than their income. This reflects a better repaying capacity of the applicant. Thus, the lower the FOIR, the higher your chances of loan approval. If you have a low FOIR, it highlights that you have fewer obligations and are not heavily in debt. It therefore automatically increases your disposable income by enhancing your repaying capacity. It also shows that you are a responsible borrower who is not deeply in debt.

Lenders analyse your credit history, sources of income, assets, and liabilities. Lenders look into every detail of income as well as instalments of all current loans the applicant is still paying. So once lenders check FOIR, they even gather details like the credit history of the applicant, income, savings history, annual tax, etc.

How to Calculate FOIR?

The FOIR calculation is relatively simple.

The monthly debts of an applicant are gathered from factors such as monthly EMIs, Credit Card Bills, and any other form of debt that the applicant is obliged to pay on a monthly basis. The debt is divided by the applicant's gross monthly income and then multiplied by 100 to calculate the FOIR.

The FOIR Calculation Formula

FOIR Formula = (Total Monthly Loan Obligations / Gross Monthly Income) x 100

A Step-by-Step Breakdown of How to Calculate Your FOIR

Step 1: Calculate Total Monthly Loan Obligations

Sum up all your recurring monthly debt payments. To do this, consider loan EMIs, credit card minimum payments, or any other consistent financial obligations.

Step 2: Calculate Gross Monthly Income

Add all your income sources, including monthly salary, rental income, or business profits. Note that gross income refers to earnings before taxes or deductions.

Step 3: Apply The Formula

Divide your total monthly obligations by your gross monthly income, then multiply the result by 100 to express it as a percentage.

Example: Assume your total monthly loan obligations sum up to INR 15,000 and your gross monthly income is INR 60,000.

Plug these numbers in the FOIR formula, and you’ll get 15,000 / 60,000 = 0.25

Multiply 0.25 by 100, and your FOIR is 25%. This means that 25% of your gross monthly income is used to cover your fixed monthly debt obligations.

Interpreting Your FOIR

FOIR is an important indicator of your financial health and how lenders perceive your ability to manage debt. Here’s a breakdown of how your FOIR can be interpreted when you apply for loans:

A Low FOIR

FOIR < 40% indicates a healthy financial position with a manageable debt burden. Hence,

lenders generally perceive this as low risk, increasing the likelihood of your loan approvals.

A High FOIR

FOIR > 50% means you have a substantial debt burden, perceived by lenders as a significant risk. Hence, high FOIR may lead to lower chances of loan approval or stricter lending terms.

The Ideal FOIR

FOIR between 40% and 50% is considered to be the ideal FOIR, acceptable to most lenders. As a general rule of thumb, FOIR is considered favourable when your fixed debt obligations are significantly lower than your income. This indicates a healthy repayment capacity and improves your creditworthiness.

The Importance of FOIR Calculation in Personal Loans

FOIR calculations are pivotal for personal loan approvals as they offer a clear overview of an applicant’s financial health. Here’s why FOIR is so important when applying for personal loans:

• Assessing Risk: Lenders use FOIR to evaluate an applicant’s existing debt and financial obligations. Based on this assessment, they determine whether the applicant can comfortably manage additional debt.
• Enhancing Loan Eligibility: A low FOIR indicates that the applicant has sufficient disposable income to repay the loan, thereby increasing the likelihood of loan approval.
• Encouraging Responsible Borrowing: Understanding FOIR is also important for borrowers as it can help them prevent over-indebtedness and minimise financial stress.
• Negotiating Loan Terms: A low FOIR – combined with a good credit score and a stable source of income – can strengthen a borrower’s position when negotiating for better interest rates and favourable loan terms.

Impact of FOIR on Personal Loan Interest Rates

Borrowers with a low FOIR are considered low-risk due to their higher repayment capacity. As a result, they may qualify for personal loans at more competitive interest rates, reducing the overall cost of borrowing.

Conversely, a high FOIR signals a greater debt burden. Such applicants are seen as higher-risk borrowers and may be offered loans at higher interest rates, if approved at all.

Please note that while FOIR is an important factor, the final interest rate will depend on several other factors, including the applicant’s age, income, credit score, and lender policies at the time of loan application.

Personal Loan Eligibility and FOIR

A lower FOIR increases the chances of loan approval, whereas a higher FOIR may result in lower loan amounts or even loan rejection.

What Are the Ways in Which FOIR Can Be Reduced?

There are a few checks you can complete at your end itself for a successful personal loan application:

1. Joint Loan
   You can consider applying for your personal loan with a co-applicant, who is working and is a spouse, parent or sibling. You then have higher chances of loan approval because, in such a scenario, the EMI burden is divided.
2. Timely Repayments of Debts
   You must try to maintain a healthy credit history towards all your debts. This includes EMIs, credit card payments, overdraft repayment, etc.
3. Low Credit Utilisation Ratio
   The credit utilisation ratio is the ratio between your credit amounts to the maximum credit that is available to you. As a thumb rule, this should be kept under 30% before applying for a personal loan. If the potential borrower’s credit utilisation ratio is consistently high, then it is more likely that a personal loan application will be rejected.
4. Avoid Multiple Loans
   Lenders want to lend to individuals who can manage their finances well. If a borrower has taken multiple loans like personal, home, etc, then it’s possible that it is looked at as a sign that the borrower is not able to handle his finances well.
5. Avoid Frequent Job Switches
   If a potential borrower has switched many jobs over a very short period of time, then lenders may consider such a profile as a negative profile for personal loans.

Conclusion

We have seen all the factors that impact FOIR, and we have seen the importance of FOIR, which is the most important factor for lenders to decide your personal loan eligibility. Maintaining a healthy credit history is the key to lowering your FOIR and getting a personal loan easily.

To support your financial goals, SMFG India Credit offers personal loans of up to INR 30 lakhs* at competitive interest rates and flexible tenures ranging from 12 to 60 months.

Before you apply for a personal loan online, make sure to have the following documents in place:

1. Application form and a recent photograph
2. Identity proof (passport, voter ID, PAN card, driving licence)
3. Address proof (ration card, telephone bill, electricity bill, rental agreement, driving licence, passport, bank statement, passbook)
4. Age proof (PAN card, passport)
5. Bank statement for the last 6 months
6. Salary slips for the past 3 months
7. For self-employed individuals, income statements and other financial documents for the last 2 years attested by a Chartered Accountant
8. For SMEs, audited financials for the past 2 years

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