What is Fixed Obligation to Income Ratio (FOIR)?

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Understanding the Fixed Obligation to Income Ratio (FOIR) is crucial while applying for a personal loan. It suggests a sturdy economic popularity and can accelerate the loan approval method. Banks remember a couple of factors to make sure of the borrower’s reimbursement potential, and FOIR is one among them. FOIR is a parameter that determines loan approval and interest rates. This article will cover diverse elements of FOIR, which include its features, calculations, and effects on real belongings investments.

What is FOIR? 

The Fixed Obligation to Income Ratio (FOIR) is an economic metric that creditors use to evaluate a borrower’s creditworthiness. FOIR is calculated with the aid of dividing the borrower’s constant duties, along with month-to-month mortgage payments, via their month-to-month profits. This ratio is expressed as a percentage, with a decrease in FOIR indicating a lower hazard for the lender. On average, a reputable borrower has a FOIR between 40 and fifty-five consistent with cent, which may additionally vary for high-internet-worth people.

FOIR is vital in evaluating a borrower’s potential to take on additional economic responsibilities while coping with their debts. Lenders have a maximum FOIR restriction that borrowers have to meet to qualify for a mortgage. For example, if the FOIR limit is 50 per cent, it method that the borrower’s general fixed responsibilities must no longer exceed 50 consistent with cent of their month-to-month earnings.

A borrower’s FOIR ratio can extensively impact their chances of loan approval. Lenders opt for borrowers with a decreased FOIR ratio because it shows higher disposable earnings and a lower danger of loan default. Therefore, maintaining a healthful FOIR ratio is vital for debtors searching for to increase their mortgage approval chances. This can be carried out by means of correctly handling existing debts and retaining constant duties to a minimal.

How is FOIR Calculated?

The FOIR is calculated by dividing your fixed financial obligations by your monthly income and multiplying the result by 100 to express it as a percentage. The formula looks like this:

FOIR = (Total Fixed Obligations / Monthly Income) x 100

Fixed obligations typically include existing loan EMIs (Equated Monthly Installments), credit card payments, and any other fixed monthly financial commitments.

ALSO READ: What is Earnest Money Deposit?

Why is FOIR Important?

FOIR serves a crucial purpose in the world of lending, and here’s why it matters:

  • Risk Assessment 

Lenders use FOIR as a risk assessment tool. It helps them gauge whether a borrower can comfortably manage an additional loan without overburdening themselves financially. A lower FOIR suggests a borrower has more room for additional debt, while a higher FOIR indicates potential financial strain.

  • Loan Eligibility 

FOIR plays a pivotal role in determining your eligibility for loans. Different lenders may have varying FOIR limits, but in general, a lower FOIR enhances your chances of loan approval. It demonstrates your ability to handle financial responsibilities.

  • Loan Amount Approval 

Even if you’re eligible for a loan, your FOIR can impact the approved loan amount. A lower FOIR might lead to a higher loan approval amount, while a higher FOIR might limit the loan amount to ensure you can manage the monthly payments.

  • Financial Stability 

Maintaining a healthy FOIR is a sign of financial stability. It reflects your ability to meet your financial obligations without stretching your resources thin.

ALSO SEE: What are the factors that affect personal loan amounts?

How to Manage FOIR Effectively?

To ensure a favourable FOIR and manage your finances responsibly:

  1. Budget Wisely: Keep a detailed budget to track your income and expenses, including loan EMIs and credit card payments.
  2. Reduce High-Interest Debt: Prioritize paying off high-interest debt to free up your monthly income.
  3. Avoid Unnecessary Loans: Only take on loans when necessary and ensure they fit within your FOIR limits.
  4. Increase Income: Consider ways to boost your income to improve your FOIR, such as side gigs or investments.

How to reduce the FOIR percentage?

Reducing your Fixed Obligation to Income Ratio (FOIR) percentage is a smart financial move that can enhance your eligibility for loans and improve your overall financial health. Here are some actionable steps to help you lower your FOIR:

  1. Pay Off High-Interest Debt: Start by tackling high-interest debts like credit card balances and personal loans. Paying off these debts will not only reduce your FOIR but also save you money on interest.
  2. Consolidate Loans: Consider consolidating multiple loans into one with a lower interest rate. This can help reduce your monthly obligations and, consequently, your FOIR.
  3. Refinance Existing Loans: If you have loans with high interest rates, explore options to refinance them at a lower rate. Lower interest rates can lead to lower EMIs, which, in turn, lowers your FOIR.
  4. Increase Income: Find ways to boost your income, such as taking on a part-time job, freelancing, or investing in income-generating assets. The additional income can help offset your existing obligations.
  5. Prioritize Essential Expenses: Review your monthly expenses and cut down on non-essential items. Redirect the savings towards paying off debt or increasing your savings.
  6. Avoid New Debt: Be cautious about taking on new debt while you’re working on reducing your FOIR. Avoid unnecessary loans and focus on improving your financial stability.
  7. Negotiate Lower Interest Rates: Contact your existing lenders and negotiate for lower interest rates. A reduced interest rate can lead to lower monthly payments and a lower FOIR.
  8. Increase Earnings from Investments: If you have investments, explore options to increase their yield. This could involve rebalancing your investment portfolio or seeking higher-returning investment opportunities.
  9. Use Windfalls Wisely: If you receive unexpected windfalls, such as a tax refund or a bonus, consider using them to pay down debt rather than splurging on discretionary expenses.
  10. Create a Detailed Budget: Maintain a detailed budget that tracks your income and expenses. It will help you identify areas where you can cut back and allocate more funds towards debt repayment.
  11. Seek Financial Guidance: Consult with a financial advisor or credit counsellor. They can provide personalized guidance on managing your debt and improving your financial situation.
  12. Consider Increasing EMI Amounts: If your budget allows, consider voluntarily increasing the EMIs on your loans. While it may seem counterintuitive, it can help you pay off loans faster and reduce your FOIR.

Remember that reducing your FOIR takes time and discipline. It’s a gradual process that requires careful financial planning and commitment. Prioritize your financial goals, stick to your budget, and focus on paying down debts to lower your FOIR and improve your financial standing over time.


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