Before approving a loan, lenders ensure that the borrower fulfills the eligibility criteria and assess their creditworthiness. Any lender’s main concern is whether the borrower will be able to repay the loan amount.

To reduce risk, lenders check income, credit history, financial liabilities, and other documents. Based on a borrower’s income, lenders calculate 3 different ratios to determine eligibility.

These ratios are FOIR (Fixed Obligation to Income Ratio), LTV (Loan-to-value ratio), and IIR (Installment Income Ratio). Here, we will understand what FOIR is, FOIR calculation, and how FOIR affects personal loan approval.

What is FOIR?

FOIR (Fixed Obligation to Income Ratio) is a tool used by lenders to assess an individual’s ability to repay a loan by comparing their fixed monthly obligations, like loan repayments and rent, to their monthly income. FOIR is expressed in the form of a percentage and helps lenders assess if the borrower can manage the additional debt burden of a new loan.

A lower FOIR indicates a lower current debt-to-income ratio, which typically increases the probability of loan approval.

Borrowers are required to stick to the predetermined FOIR percentages set by all lenders. While it varies from lender to lender, the FOIR limit is often between 40% and 50%.

How is FOIR calculated?

To calculate FOIR, the applicant’s total monthly obligations, including all existing EMI payments, credit card bill amounts, rent, and living expenditures, are divided by their total monthly income and multiplied by 100.

FOIR = (Sum of All Existing Obligations/Net Monthly Salary) x 100

Lenders typically set a maximum FOIR limit based on the type of loan. A lower FOIR indicates a stronger financial position, which means you will have a higher chance of getting a loan.

FOIR Calculation Example:

If Mr. Y has a total monthly income of ₹50,000. His monthly obligations include a home loan EMI of ₹5,000 and credit card charges of ₹10,000. Now, Mr. Y has applied for a personal loan; let’s see the calculation for FOIR.