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Factors that influence the loan amount you can afford

Factors that influence how much loan you can afford:

  • Income: Your income plays a major role in deciding your loan amount. Usually 30 to 45% of your monthly gross income can be utilised for paying EMI, which in turn decides the amount of loan that you can borrow.
  • Expenses: Your monthly expenditure determines the amount of money you are left with which you can utilise to repay your loan. While calculating this consider the future expenses and inflation.
  • Lifestyle: You should aim to take on only as much loan that will allow you to continue your present lifestyle. This may mean that you will continue to eat outside or take vacations while repaying your loan.
  • Personality: Irrespective of income and expenditure, the risk taking appetite and the attitude towards debt varies from one individual to another. Such non-financial factors should also be considered while making a decision about how much you can borrow.

Your gross monthly income – and of course expenditure too! – is the most important criteria that determines the ability to pay EMI. Therefore you should first calculate your monthly income and deduct your monthly expenditures such as groceries, utility bills, medical expenditures, entertainment cost etc.. From the remaining amount set aside another 10% – 15% of your monthly income for savings and investments that may come in handy in case of emergency needs. You can utilise the remaining amount towards paying your EMI. It is good if your EMI does not exceed 30 – 45% of your monthly income.

Here’s an example:

Assume Mr. X’s monthly income is Rs. 70,000, monthly expenditure is Rs. 25,000 and savings is Rs. 15,000. The remaining amount Rs. 70,000 – (Rs. 25,000 + Rs. 15,000) = Rs. 30,000 can be utilised towards EMI. If we assume that the rate of interest is 10.5% and the loan tenure is 20 years, then for this EMI amount, i.e., Rs.30,000, the affordable loan amount would be Rs. 30,04,868. Mr. X will be paying Rs. 41,95,132 as interest amount on that loan and the total repayment amount (principal + interest) would be Rs. 72,00,000.

Please note that, in case of home loan, the bank will decide the loan amount depending on the value of the property, your income and your credit rating. The calculator here is meant to help you make an assessment that enables you to decide the budget for your property. Similar criteria will be used by banks before granting personal loan or car loan.

Conclusion

A loan (especially home loan) is a long term and big financial commitment. Do not make the decision hurriedly. Do your math. The above mentioned factors, i.e., present income, expenditure, lifestyle and personality do matter in this regard. Consider all optimistic and pessimistic scenarios. Ask all ‘What ifs… ?’ to yourself. Use loan affordability calculator and explore all the options and obligations before availing a loan.