Budgeting your EMI in your income

By BankBazaar.com | July 12, 2011

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.

Did you ever wonder why your EMI is generally restricted to 30% or 40% 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% of your monthly gross income to be repaid as EMI. It is restricted to 30 % or  40% 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.

The might be spikes in interest rates. 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 a scenario if you have  adequate funds in hand you could prepay at intervals, allowing scope for closing your loan early.

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13 thoughts on “Budgeting your EMI in your income

  1. Ravi

    Very useful article ! The concept of budgeting your EMI is explained in simple terms. Thanks for publishing and also expect more such articles in future.

    Reply
  2. divya

    Absolutely true. But for unmarried people, this is a forewarning. Invest wisely.

    Reply
    1. raj

      no matter how wise you are.. once in EMI , you are always in EMI..ha ha.

      Reply
  3. Pradeep

    most of the companies in india launch “fraud” products…….once you are in, you get trapped……..the agents are also very active “at the beginning”, they keep on chasing you but and once they get their commission, you have to chase them. Some of the companies take their “service charges” from your initial payment and then “play” with the remaining money the way they want……again you are a loser…..think twicel, thrice or even one hundred times before you invest your hard earned anywhere

    Reply
  4. kamlesh

    nice it very true . it also better to finished the loan has soon as possible

    Reply
  5. S SURYANARAYAN

    This is a good article and all should follow the guidelines before buying the dream home.

    thanks

    Reply
  6. Aman

    This is a good article. Gave us an insight on how to decide your EMI

    Reply
  7. R.Gunasekar.

    It is very true. One can not foresee what would happen over a period of a year. Just imagine the long time period of 10 to 15 years in which one will come across several obstacles and critical times to manage the finance. With good faith and confident one could venture but within the manageable risk and management.. It is good to have such articlesposted and it would nice too if some could share their experiences in going thro'their loan repayments in their life time.

    Reply
  8. Pawan Garg

    I am strictly against taking the loans other then the fixed terms loans i.e., car loan.
    My personal thinking is Loans increase someone's purchasing power and with powers responsibility comes-in, so always try to use it only when required badly.

    Reply
  9. Ravishankar

    Very useful article…… Expected many more to educate young to choose right option.

    Reply
  10. Krishan Kumar Sharma

    Thanks for the guidelines. Now I personally shall not make such chances blindly.

    Reply
  11. Indian

    And moreover the ROI may increase in future like now and you may not know when the bank will revise the EMI. You would have budgeted for x amt and you need to manage the difference in EMI for every month.

    Reply
  12. Sanjay

    If i am Co-applicant of my Brother in Law's brother for a property ,So could i get a Home loan with my name in that case.

    Reply

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