How Much EMI Is Right For You?

  Author: Naveen Kumar

If you take loans beyond your capacity to repay, most, if not all, of what you earn, will go in loan repayment. This can put a strain on your finances and make it difficult to meet your regular expenses. Over time, you might also find it difficult to service loan liabilities every month or your equated monthly instalments (EMIs). If you default on the repayment of your loan, you are likely to spoil your credit history and your credit score is likely to get impacted. This will mean lower or no access to future loans. Further, when you are spending most of your income in repaying loans and meeting current expenses, there is precious little left for you to invest for your important future needs like buying a home, children’s higher education and retirement.

So, how do you borrow right? Here are two important tips to guide you so that you don’t cross the limit when it comes to your EMIs.

Don’t let sum of all EMIs exceed half of your take home pay

Be it home, car or any other loans, the total payout should be less than half your take-home pay. Ideally, it should be much lesser than that as it will give you financial headroom to manoeuvre to adapt to unforeseen events such as rise in the home loan rate of your floating rate home loan in the course of the tenure.

Give preference to home and study loans

Study and home loans can create higher future income. That’s why ideally most of the EMI limit of 50% of take home pay should be taken up by them. On the other hand, car, personal and other consumption loans shouldn’t exceed 15% of your take home pay.

What we have provided here are thumb rules which can guide you. Your individual financial realities should finally determine your EMIs. For instance, if you have many financial dependents, you need to be more conservative when it comes to taking loans. Needless to say, following these tips will ensure that your EMIs are within the comfortable limit and repaying them is not a strain on your finances.

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