written by | November 1, 2022

All About FOIR Calculation and How it Affects Your Loan Eligibility

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In finance, the FOIR is short for the "Fixed Obligations to Income Ratio." The FOIR measures the percentage of a borrower's monthly gross income spent on monthly debt obligations, including mortgage payments, car loans, credit card payments, alimony, and child support. Lenders use the FOIR to help assess borrowers' ability to make their monthly loan payments. A high FOIR indicates that a borrower may have difficulty making their loan payments, while a low FOIR suggests that a borrower is likely to have more monthly money to make their loan payments.

Do you know? The fixed obligation to income ratio (FOIR) is a metric used by lenders to assess an individual's ability to repay a loan. A high FOIR indicates an individual has a high debt burden and may be unable to repay a loan.

What is FOIR Meaning?

The fixed obligation to income ratio is a debt service coverage ratio used to determine a borrower’s ability to make their monthly debt payments. This ratio is calculated by dividing the borrower’s monthly debt payments by their monthly income. A ratio of less than one indicates that the borrower does not have enough income to cover their debt payments. A ratio of greater than one indicates that the borrower has enough income to cover their debt payments. Lenders use this ratio to determine whether a borrower can make their monthly debt payments, which is an essential factor in the decision-making process when approving a loan.

To calculate your FOIR, you'll need to know your monthly gross income and debt payments. Your monthly gross income is the amount of money you earn each month before taxes, and other deductions are taken out. Your monthly debt payments are all the recurring debts you have each month, including your mortgage, car, student loan, and credit card payments. Once you have your monthly gross income and debt payments, you can calculate your FOIR by dividing your monthly debt payments by your monthly gross income.

Also Read: Mudra Loans - Check Out a Complete Guide on How to Apply for Emudraloan

FOIR Explanation with Example

The fixed obligation to income ratio (FOIR) is a personal finance metric used to assess an individual's ability to make monthly debt payments. The balance is calculated by dividing an individual's monthly debt payments by their monthly income. A high FOIR indicates that an individual is using a large portion of their income to make debt payments, which may make it difficult for them to cover other expenses or save money. A low FOIR, on the other hand, indicates that an individual has a good handle on their debt and should have no trouble making their monthly payments. 

For example, let's say Anil has a monthly income of ₹30,000 and monthly debt payments of ₹5,000. His FOIR would be calculated as follows:

FOIR = ₹5,000 / ₹30,000 = 0.17

Anil's FOIR is low, meaning he should have no trouble making his monthly debt payments.

How FOIR Can Be Reduced

There are a few ways in which one's FOIR can be reduced: 

1. One way is by increasing income, and this can be done by working more hours, finding a higher-paying job, or earning additional income through side hustles or investments. 

2. Another way to reduce FOIR is by decreasing expenses. This may involve cutting back on unnecessary spending, automating bill payments to ensure all debts are paid on time or consolidating debts to reduce monthly payments. 

3. A third way to lower FOIR is by increasing the money saved each month. This can be accomplished by setting up a budget and sticking to it, utilising a savings account with a high-interest rate, or investing money in a long-term savings plan. 

4. Finally, FOIR can also be reduced by lengthening the repayment period for debts. This can be done by refinancing loans or credit cards with a longer repayment timeline.

Also Read: Types of Loan - What are different Types of Loan in India?

How Can FOIR Affect Personal Loans?

The FOIR can affect your loan in the following ways:

  • The fixed obligation to income ratio (FOIR) is a financial metric used to assess an individual's ability to make monthly payments on their debts. 
  • A high FOIR indicates that a large portion of an individual's income is dedicated to debt payments, making it difficult to cover other expenses or save for future goals. 
  • A low FOIR, on the other hand, suggests that an individual has a lower debt burden and may have more flexibility in their budget.
  • The FOIR can be helpful for both borrowers and lenders when considering a personal loan
  • A high FOIR may make it difficult for borrowers to qualify for a loan or result in a higher interest rate. 
  • Lenders may use the FOIR to assess an individual's ability to repay a loan and to set appropriate terms and conditions. 
  • The FOIR is just one factor that lenders may consider when making a lending decision, and it is essential to compare offers from multiple lenders to find the best deal.

What Should I Do if My Fixed Obligation to Income Ratio Is High?

Your fixed obligations are mandatory expenses that don't fluctuate from month to months, such as mortgage or rent payments, car loans, insurance premiums, and child support. Your income is, of course, your total earnings from all sources. To calculate your fixed obligation to income ratio, divide your total monthly fixed obligations by your gross monthly income.

If your fixed obligation to income ratio is high, a large portion of your income is going towards mandatory expenses. This can make it difficult to save money or make other financial decisions.

If your fixed obligation to income ratio is high, you can do a few things to improve your financial situation. One option is to negotiate with your creditors to lower your monthly payments. This may be possible if you demonstrate that you are struggling to make your current payments. Another option is to try to consolidate your debts into one monthly payment. This can be done by taking out a personal loan or using a credit card with a low-interest rate. However, you will need to be careful with this option, as it can lead to further debt if you are not careful. Finally, you can try to increase your income by finding a better-paying job or taking on additional freelance work. This may be difficult in the current economic climate, but it is worth exploring all of your options.

Whatever you do, try to keep your fixed obligation-to-income ratio as low as possible, giving you more financial flexibility and peace of mind.

Also Read: Government Loan Schemes for Small Businesses In India

Conclusion:

The fixed obligation to income ratio (FOIR) is a personal finance metric that compares an individual's monthly debt obligations to their monthly income. The balance is calculated by dividing an individual's monthly debt payments by their gross income. A higher FOIR indicates a higher debt burden, and a lower FOIR means a lower debt burden.

Lenders use the FOIR to assess an individual's ability to repay their debts. A high FOIR may indicate that an individual is overextended and may have difficulty making their monthly debt payments. A low FOIR may suggest that an individual has a lower debt burden and maybe a better candidate for a loan. Individuals with a high FOIR may want to consider debt consolidation or debt management programs to help lower their monthly payments. Individuals with low FOIR may consider increasing their monthly debt payments to pay off their debts sooner.

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FAQs

Q: What is a fixed obligation?

Ans:

Fixed obligation means an obligation to make a committed stream of payments under a Pre-Existing License Agreement, which obligation is not subject to cancellation or termination under the terms of such agreement.

Q: How is fixed obligation calculated?

Ans:

According to experts, the fixed obligation to income ratio is a fundamental criterion that lenders employ to determine whether or not to approve a loan application. The FOIR is determined by dividing the total debt by the applicant's monthly earnings to ensure the receiver's financial competence to repay the loan.

Q: What is a good FOIR ratio?

Ans:

Your FOIR should ideally be between 40% and 50%, which means that your overall monthly costs should not exceed 50% of your monthly revenue. Lenders may consider FOIR of up to 65% or even 70% for customers with a high net worth.

Q: How do you calculate the FOIR percentage?

Ans:

It is essentially calculated just like its expanded form - Fixed obligations to income ratio. It is a total of all existing expenses divided by all income multiplied by 100.

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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.