How To Budget Your EMI In Your Income
A long-term loan like a home loan is a debt which is a part of your budget every month. If you invest too much into it, there might not be adequate funds to manage other expenses that will accumulate with time. For eg, you need to make allowances for future funds like education expenses of children, emergency funds for a job loss or the loss of one income in a situation where two people have taken a joint loan.
Have you ever wondered why your EMI is generally restricted to 30 per cent or 40 per cent of your monthly income? Here is why.
Salary details, qualifications, employer/business, years of experience, growth prospects, alternate employment prospects and sources of other income, if any, all are aspects that determine the amount of loan you are eligible for.
Generally, the repayment schedule is worked out in a manner that allows not more than about 40 per cent of your monthly gross income to be repaid as EMI. It is restricted to 30 per cent or 40 per cent keeping the following factors in mind:
- 10 per cent of your income is spent on other loans, if you have any or if you avail of one in the future.
- 25 per cent of your income gets deducted by way of statutory deductions and for investment purposes.
- 25 per cent of your income is generally spent to meet your monthly expenses.
- This leaves 40 per cent , which is taken as your repayment capacity for this loan.
For the self-employed, profit is the benchmark that determines loan value. The longer the time frame for repaying the loan, the lower the EMI and this also means you can opt for a larger loan amount. The loan amount you are eligible for is also dependent on other factors like the company you are employed with, the location of your residence and your credit history.
There are cases where there is a spike in interest rates. In such a scenario, usually banks will increase the loan tenure so as not to put the loan taker in a tight spot by increasing his EMI. In such a scenario, if you have adequate funds in hand you could prepay at intervals, allowing scope for closing your loan early.