Fixed Obligation to Income Ratio (FOIR) is a financial ratio that measures the proportion of a borrower’s fixed financial obligations to their income. It is an essential factor that lenders use to determine a borrower’s creditworthiness when they apply for a loan. Lenders use FOIR to assess the ability of the borrower to meet their fixed financial obligations, including existing loan repayments, credit card payments, rent payments, and other fixed expenses, after considering their income.
FOIR is a ratio of the borrower’s total fixed obligations to their net monthly income. The formula for calculating FOIR is:
For example, if a borrower has total fixed obligations of Rs.50,000/- per month and a net monthly income of Rs.1,00,000/-, the FOIR would be –
Importance of FOIR for Lenders
FOIR is an essential factor that lenders use to determine a borrower’s creditworthiness. It is a valuable tool for lenders to assess whether the borrower can repay the loan after considering their existing fixed financial obligations. Lenders use FOIR to evaluate the risk of lending to the borrower and to determine the loan amount, interest rate, and repayment period.
Lenders typically set a maximum FOIR that a borrower can have to qualify for a loan. The maximum FOIR varies depending on the lender, the type of loan, and the borrower’s credit profile. For example, a lender may require a maximum FOIR of 40% for a personal loan, while the maximum FOIR maybe 50% for a home loan.
Importance of FOIR for Borrowers
FOIR is also essential for borrowers to consider when applying for a loan. By understanding their FOIR, borrowers can determine whether they can repay the loan after considering their existing fixed financial obligations. Borrowers can use the FOIR to evaluate their financial position and make informed decisions when borrowing money.
If the FOIR is high, it may indicate that the borrower is already overburdened with fixed financial obligations and may need help to afford the additional debt. In such cases, the borrower may need to reduce their existing fixed obligations or increase their income to improve their FOIR. Alternatively, the borrower may need to apply for a smaller loan or a more extended repayment period to reduce the monthly repayment amount.
Factors that Affect FOIR
Fixed Obligations
The total amount of fixed obligations, including loan repayments, credit card payments, rent payments, and other fixed expenses, can affect the FOIR. Higher fixed obligations can result in a higher FOIR, making it difficult for the borrower to qualify for a loan.
Income
The borrower’s income is another factor affecting the FOIR. Higher income can result in a lower FOIR, making it easier for the borrower to qualify for a loan.
Loan Amount
The loan amount is another factor affecting the FOIR. Higher loan amounts can result in a higher FOIR, making it difficult for the borrower to qualify.
Loan Term
The loan term is another factor affecting the FOIR. Longer loan terms can result in a lower FOIR, making it easier for the borrower to qualify.
Fixed Obligation to Income Ratio (FOIR) is a significant financial ratio that measures the proportion of a borrower’s fixed financial obligations to their income. It is an essential factor that lenders use to assess the borrower’s creditworthiness when they apply for a loan. By understanding their FOIR, borrowers can determine whether they can repay the loan after considering their existing fixed financial obligations. Lenders use FOIR to evaluate the risk of lending to the borrower and to choose the loan amount, interest rate, and repayment period.
Borrowers must maintain a good FOIR to improve their chances of getting loan approval. One way to enhance FOIR is to reduce fixed financial obligations by paying off existing debts, avoiding new debts, and cutting down unnecessary expenses. Another way is to increase their income by taking up additional employment, negotiating for a salary raise, or starting a side business.
To evaluate a borrower’s creditworthiness, lenders also look at FOIR in conjunction with other factors such as credit score, employment history, and debt-to-income ratio (DTI). A good credit score, stable employment history, and a low DTI can help improve the chances of getting approved for loans, even if the FOIR is high.
The Fixed Obligation to Income Ratio (FOIR) is a significant financial ratio that measures the proportion of a borrower’s fixed financial obligations to their income. It is an essential factor that lenders use to assess a borrower’s creditworthiness when they apply for a loan. Borrowers should maintain a good FOIR by reducing fixed financial obligations and increasing their income to improve their chances of getting loan approval. Lenders also take into account other factors such as credit score, employment history, and DTI to evaluate a borrower’s creditworthiness.