Can You Afford Another Loan? Check It Out!

By Adhil Shetty | April 27, 2018

You must always consider taking a loan only after due diligence. Read on to know how you can avoid making multiple loans a financial distress.

Banks and NBFCs have made borrowing easy, enabling us to opt for things which otherwise seem difficult with limited income. The equated monthly installments (EMIs) feature of a loan ensures that we can own assets like home, car, bikes etc. Your potential to take a loan depends on your repaying capacity. Similarly, affording another loan depends on your existing income and repaying capacity. Therefore, it is crucial to differentiate between a good or bad decision and timing to go for a loan.

How The Decisions Affect Your Personal Finance

If you borrow money that would help you to generate income in future, then it makes sense to take such loan. For example, if you buy a house through a Home Loan or buy a truck for business operations, then this is a good loan as these assets would give returns. Basically, the loan which is not harsh on your pockets and does not come with a rude interest rate could be healthy.

It can be a bad decision if you go for a loan that is not helping you in generating income and is a depreciating asset. It can also be bad for your financial health if you go for such a loan when you have an existing loan and there is no increase in income.

Also, one should avoid too many loans because it may put you at risk of default and spoil your Credit Score.

How Many Loans Can You Afford?

You should only for loans that you can repay and which doesn’t affect your other financial obligations, and objectives. For example, your income is Rs 1 lakh and you have an existing home loan for which you pay an EMI or Rs 50K and spend Rs 40K on regular expenses. The rest Rs 10 K you invest in mutual fund SIP for your child’s education to build a corpus of Rs 10 lakh in 6 years. You buy a car on a loan of Rs 10 lakh and fixed an obligation to pay EMI of Rs 16 K (for 7 years) without analysing the impact on your financial goal. You are now left with no choice but to stop the SIP and reduce your regular expenses. Therefore, it doesn’t make sense to add another loan until your repayment capacity increases. Let us understand this better with the example in the table.

Loan Affordability
Case Total Monthly Income (In Rs) Regular monthly expenses (In Rs) Investment/Month (In Rs) EMI against existing home loan (In Rs) Additional EMI paying capacity (In Rs) Can you afford another loan?
Existing situation 100000 40000 10000 50000 0

 

No
When income increases by 20% after 1 year & Increase in expense by 7% (Assumed inflation @7%) 120000 42800 10000 50000 17200 Yes, additional EMI should be less than or equal to Rs 17200

Things to check before getting another loan? 

Take another loan only if helps you are not comprising on your financial objective, and repayment is not a stress for you. It is always better to plan and invest in a financial product that can help you in avoiding loans and can save you from any kind of financial burden.

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About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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