FOIR (Fixed Obligation to Income Ratio): How to Reduce It?
FOIR (full form – Fixed Obligation to Income Ratio) is a parameter that helps determine a borrower’s loan eligibility. With advancements in the lending market, financial institutions are becoming more flexible with their eligibility criteria.
What is FOIR (Fixed Obligation to Income Ratio)?
FOIR is an abbreviation for Fixed Obligation to Income Ratio, which is a financial metric used by lenders to determine a borrower’s ability to repay a loan. FOIR is calculated by dividing the borrower’s fixed obligations, such as existing loan payments and monthly rent, by their monthly gross income. This ratio informs lenders about how much of a borrower’s monthly income is already dedicated to existing financial obligations and, as a result, how much they can afford to repay on a new loan. Lenders usually have a maximum FOIR limit that varies depending on the type of loan and the lender’s risk tolerance. A lower FOIR generally indicates a stronger financial position, which can improve loan approval and terms.
How is FOIR Calculated for Loan Eligibility?
To analyse your repayment capacity and find out whether you are eligible for a loan, lenders use the following formula and calculator for FOIR calculation:
FOIR Formula
FOIR = [Total debt / monthly salary] x 100
Your total debt will include every financial obligation you have in a month, except tax, PF, and investment. Let’s understand this better by considering an example.
FOIR Calculation
Let’s say Rajeev earns a monthly wage of Rs. 70,000. Recently, he took a car loan with an EMI of Rs. 10,000. Furthermore, his monthly living expenses come to nearly Rs. 25,000.
Thus, Rajeev’s monthly financial obligation is Rs. 10,000 + Rs. 25,000 = Rs. 35,000 and the disposable income is Rs. 70,000 (salary) – Rs. 35,000 (debt) = Rs. 35,000.
FOIR = [35,000 / 70,000] x 100 = 50%
FOIR of 50% indicates that Rajeev has enough funds left from his disposable income to pay the EMI amount of a new loan. Thus, if he has the required documents and passes other eligibility criteria, most lenders will offer Rajeev an affordable loan.
However, keeping all the other values the same, let’s consider that Rajeev’s monthly income becomes Rs. 60,000.
Thus, FOIR will be 58.3% [(35,000/60,000) x 100]
In this case, most lenders will consider his disposable income of Rs. 25,000 as too low for a new loan.
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What are the Ways in which FOIR can be Reduced?
FOIR (Fixed Obligation to Income Ratio) is a financial metric used by lenders to determine a borrower’s ability to repay a loan. A lower FOIR indicates that a borrower is more likely to repay a loan. Here are some ideas for reducing FOIR:
1. Increase Income
One way to reduce FOIR is to increase your income. You can consider taking a second job, starting a side business or freelancing, or negotiating a raise at work.
2. Pay off Debt
Paying off outstanding debts can help reduce your FOIR. You can prioritize paying off high-interest loans or credit cards first, and then work your way down to other debts.
3. Lower Monthly Expenses
Lowering your monthly expenses can also reduce your FOIR. You can consider cutting back on discretionary spending or negotiating lower bills for services like utilities or insurance.
4. Extend Loan Tenure
Extending the tenure of a loan can also help reduce FOIR, as it reduces the monthly payments. However, this may result in paying more interest over the life of the loan.
5. Opt for a Lower Loan Amount
Reducing the loan amount can lower the FOIR. Consider borrowing only what you need and avoiding additional borrowings for luxury expenses.
6. Improve Credit Score
A higher credit score indicates a better credit history and lower risk of default. By improving your credit score, you may be able to negotiate better loan terms, including a lower FOIR.
7. Co-signer
Having a co-signer with a higher income can also help reduce your FOIR, as it increases the total income considered for the loan. However, this requires finding a willing co-signer who trusts you to repay the loan.
FOIR’s Impact On Personal Loans
- FOIR is relevant to all types of loans such as personal loans, home loans, etc. In the case of a home loan, lenders can make up for their losses by taking over the asset you kept as collateral.
- However, a personal loan is unsecured and collateral-free, which is risky for lenders. Due to the lack of asset security, lenders will incur higher losses if a borrower defaults on loan repayment. Thus, most financial institutions will be more stringent with their eligibility parameters, especially FOIR.
- A higher FOIR for personal loans indicates heavy debt and less disposable income, lowering a borrower’s creditworthiness. Thus, if you want your personal loan to be approved, paying attention to existing obligations is highly crucial.
- A borrower’s FOIR can also impact the interest rate they receive on a personal loan. A lower FOIR can lead to a lower interest rate, as it indicates a lower risk of default.
- FOIR can also impact the loan processing time. A high FOIR may result in a longer processing time, as lenders may need additional time to evaluate the borrower’s creditworthiness.
Do All Banks Have a Standard FOIR?
No, banks and financial institutions do not have a uniform FOIR (Fixed Obligation to Income Ratio) for all loan types. FOIR is a financial metric that lenders use to determine a borrower’s ability to repay a loan. Each lender’s FOIR criteria may differ depending on factors such as the borrower’s income, credit history, employment status, loan amount, loan tenure, and other financial obligations. The acceptable FOIR varies depending on the type of loan. For a secured loan, such as a home loan, where the collateral value can offset the risk of default, lenders may accept a higher FOIR. Borrowers must therefore check each lender’s FOIR criteria before applying for a loan.
What Should I Do If My FOIR is High?
There are several steps you can take to reduce your FOIR (Fixed Obligation to Income Ratio). First, you can supplement your income by taking on a second job or freelancing. Second, pay down existing debts, beginning with high-interest loans or credit cards. Third, reduce your monthly expenses by reducing discretionary spending and negotiating lower utility or insurance bills. Fourth, choose a lower loan amount or a longer loan term. Fifth, raise your credit score by paying your bills on time and keeping your credit card balances low. Finally, look for a co-signer with a higher income to boost the total income considered for the loan.
How to Reduce FOIR?
Cash loans are highly preferable as they cater to the urgent financial needs of an individual. But for borrowers with high debt, it is unfortunate that they cannot receive aid. However, you can reduce your FOIR in the following ways:
1. Apply For A Joint Loan
By having a co-applicant, the burden of EMI payment gets equally divided. So, lenders feel more assured of getting back their loan amount with interest. Thus, it improves your chances of getting a loan.
2. Repay Debts Regularly
If your credit history shows that you have paid all your past loans, EMIs, and credit card payments on time, the lender can trust you to pay the EMIs on time.
3. Avoid Applying For Multiple Loans
Taking too many loans at once or one after the other increases the EMI component of your financial debt. Furthermore, it gives an idea that you do not know how to manage your finances.
4. Maintain A Low Credit Utilisation Ratio
If the proportion of your credit amount that you are utilising to the maximum credit available to you is more than 30%, lenders are more likely to reject your loan application.
5. Increase Income
Increasing your income is one way to reduce FOIR. You can consider working overtime, getting a second job, or freelancing to increase your income.
Final Word
Most borrowers are either unaware of the fixed obligations to income ratio or ignore its importance. As it represents an applicant’s repayment capability, FOIR is one of the primary parameters that a lender considers while approving or rejecting a loan request. Especially for personal loans, a bad FOIR means that paying a high EMI amount will be difficult or impossible for the borrower. Fortunately, you can reduce FOIR and get a loan using the above-mentioned strategies.
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FAQs
There is no standard margin set for FOIR. However, most financial institutions require an applicant’s fixed obligation to income ratio to remain between 40% and 55%. This range can differ with the type of loan and net worth of a borrower.
Non-performing assets are those loans or advances that appear in default or arrear section of a bank’s financial statements. An asset becomes non-performing for a bank when a borrower delays interest or principal payment. Thus, the respective bank generates no income from the asset.
Only your close relatives can be your co-borrowers. So, while applying for a loan, you can only list your siblings, parents, spouses, or children as your co-applicant. Taking a joint loan improves your credit score and eligibility.
Financial institutions determine eligibility using the fixed obligation to income ratio (FOIR), instalment to income ratio (IIR), and loan-to-value ratio (LTV). These three ratios help a lender calculate your disposable income and analyse your ability to repay the loan.
To determine your loan eligibility, lenders can use a multiplier method. Under this method, they provide a multiplier to your monthly salary. The formula is Loan Eligibility = Multiplier x Monthly Income. The multiplier can range from 9 to 18, depending on your credit profile and current employment status.
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