Bugeting your EMI in your income!
Did you ever wonder why your EMI is generally restricted to 30% or 50% 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, not to mention your credit history, which is determined by how you have repaid loans if any in the past and how regular you are with your credit card payments etc., all are factors 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 50% of your monthly gross income to be repaid as EMI. It is restricted to 30 % or 50% keeping the following factors in mind:
10% of your income is spent on other loans, if you have any or if you avail one in the future.
25% of your income gets deducted by way of statutory deductions and for investment purposes.
25% of your income is generally spent to meet your monthly expenses.
This leaves back 40%, which is taken as your repayment capacity for this loan.
For self-employed applicants, 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.
A long term loan like a home loan is a debt that is part of your budget every month. If you invest too much into it, there might not be adequate funds to manage a huge list of other expenses that will tend to accumulate with time. For eg. You need to make allowances for future expenses like education expenses for children, emergency funds for a job loss or the loss of one income in a situation where two people have taken a joint loan.
Another factor to consider is the spike in interest rates, especially in the case of a home loan. In such a scenario usually banks will increase the loan tenure in order not to put the loan taker in a tight spot by increasing his EMI. In such instances, if you are armed with adequate funds in hand you could prepay at intervals, allowing scope for closing your loan early.