Understanding Fixed Income Obligation Ratio (FIOR) and its effect with Example

Banks and NBFCs require collateral to minimalize the risk involved in lending money. This ensures a smooth recovery of the money granted to the borrower. Since the loan amount is secured by the bank in the form of collateral, it becomes a secured loan. If in any case, the borrower fails to repay the loan amount, the bank will take ownership of the collateral and extract the loan amount with different means.

Then there are unsecured loans. When a loan amount is granted to the borrower without any collateral, it is known as an unsecured loan. To secure the loan amount, banks need a co-signer who can guarantee on the behalf of the borrower that if the borrower fails to pay the loan amount, the co-signer will be held liable to pay the amount. Overseas education loans, a preferred choice of students for funding their higher education, is unsecured in nature. When dealing with unsecured loans, you often come across the term- Fixed Income Obligation Ratio. Let’s understand it in detail.

What is the Fixed Income Obligation Ratio?

Also known as the fixed obligation to income ratio, it is an indicator that denotes the obligations of the co-signer in the total income. At the time of taking an overseas education loan, students have to get a co-signer who has a good CIBIL score and an acceptable fixed income obligation ratio. Obligations are the constant outflow of money from the co-signer’s account. It could be monthly installments, insurance premiums, etc. These obligations are put in context with the income of the person and then the ratio is obtained.

How is FIOR calculated?

The mathematical formula to calculate FIOR is:-

Total monthly obligations/Total monthly income x 100

Fixed monthly obligations can be of various types. Credit card payments, EMIs, rent payments, Monthly expenses, and other debt obligations are a few examples. The bank evaluates that after paying for all the existing obligations, will the co-signer be able to repay the overseas education loans amount, in case the student defaults on the payment.

Effects of FIOR

FIOR plays a crucial role in evaluating your eligibility of getting overseas education loans. A good FIOR of the co-signer for your education loan makes the process seamless. However, if your co-signer has many existing obligations, it will be hard to get a loan. A good FIOR is between 40- and 50%. If the ratio lies above this value, you can rest assured about the sanction of the loan.

Example

Let’s say you have a co-signer whose income is?50,000 per month and the obligations on him are around?40,000. Now, that person is left with a comparatively lesser amount and if any more financial obligations appear, the budget of that person will falter. If the same person has obligations of around?15,000, an extra financial burden can be handled. To make sure that the co-signer’s finances don’t falter, banks take this necessary step to make sure the repayment of the loan doesn’t become a burden for the co-signer.

There are certain expenses that are not considered obligations. Expenses like fixed or recurring deposits and even the tax payable are not considered obligations on the co-signer’s part. Students who are willing to get an education loan to fund their education can use the educational loan EMI calculator to get a fair idea about the installments that need to be paid at the time of repayment.

Auxilo Finserve Pvt. Ltd. is a pro-education Nbfc registered with the Reserve Bank of India. Auxilo believes that it’s the right of every student to avail of quality education.