How to Calculate Your FOIR and Why It Matters for Loan Approval?

FOIR stands for Fixed Obligations to Income Ratio. It is a metric used by financial institutions, particularly lenders, to evaluate an individual's ability to repay a loan. FOIR represents the proportion of an individual's income that is committed to fixed obligations such as existing loan EMIs (Equated Monthly Installments), rent, insurance premiums, and other regular commitments. This ratio helps lenders determine whether the borrower has enough disposable income to service a new loan.

How to Calculate FOIR

The FOIR is calculated using the following formula:

Where:

• Total Fixed Obligations: This includes all regular, recurring financial commitments such as EMIs, rent, insurance premiums, and other fixed monthly expenses.

• Net Monthly Income: This is the income that remains after deductions like taxes and provident fund contributions. It is the actual take-home pay.

Steps to Calculate FOIR

1. List Fixed Obligations: Sum up all your fixed monthly obligations. This includes:

• Monthly EMIs for any existing loans (e.g., personal loans, car loans, home loans, credit cards).

1. Monthly rent payments.

2. Determine Net Monthly Income: Identify your net monthly income (take-home pay). This is the income you receive after all statutory deductions.

3. Apply the FOIR Formula: Use the FOIR formula to calculate the ratio.

Suppose your net monthly income is ₹75,000, and your fixed monthly obligations are:

Car Loan EMI: ₹8,000

Home Loan: ₹15,000

Rent: ₹15,000

Credit Card outstanding; 100000( 5% of total outstanding will be obligated) :₹5,000

Step-by-Step Calculation

List Fixed Obligations:

Total Fixed Obligations = Car Loan EMI + Home Loan EMI + Rent + Credit card outstanding

Total Fixed Obligations= 8000+15000+15000+5000= 45000

Determine Net Monthly Income:

Net Monthly Income = ₹75,000

Interpretation

In this example, the FOIR is 60%. This means 60% of your net monthly income is committed to fixed obligations.

Significance of the Result

• Creditworthiness: A FOIR of 60% is relatively high, indicating that a significant portion of your income is already committed to existing debts and fixed expenses.

• Loan Approval: Lenders might be cautious in approving new loans if your FOIR is 60%, as it suggests limited disposable income for servicing additional debt. Generally, lenders prefer a FOIR of 50-70% or lower.

• Financial Planning: A high FOIR indicates that you might need to reassess your financial commitments and possibly reduce some fixed obligations to lower your FOIR, making it easier to manage new debts and financial responsibilities.

By understanding and calculating your FOIR, you can get a clear picture of your financial health and make informed decisions about taking on new loans and managing your expenses.