With the increasing trend of purchasing big-ticket items like houses or cars via EMIs, it is important to evaluate how much money one should allocate toward monthly settlements. Loans are a long-term commitment, especially home loans, and the repayment tenure can take up to 20 years. While the EMI payment system helps one make their dream purchases without paying a lump sum amount upfront, you must maintain a balance between your EMI payments, cost of living, and other expenses.
What are EMIs?
EMIs or Equated Monthly Installments are the amount of money a borrower pays the lender every month to repay their loan amount. It typically consists of both the principal and the interest accrued. Your EMI amount depends on your CIBIL score, the interest charged by your lending firms, and the type of loan you have taken.
40% EMI rule
The thumb rule to follow when taking care of your debts and financial obligations is that you must not spend more than 40% of your income on paying EMIs. For example, if your net income is around INR 1 lakh rupees, you must not spend more than INR 40,000 on EMIs. By following this rule, you can ensure that you can comfortably pay off your liabilities without compromising your quality of living.
However, percentages may also be deceptive. If you earn INR 20,000 per month and you spend 40% of that income on EMIs, you will only be left with only INR 12,000. So, make sure to evaluate your expenses and cost of living before signing up for a home loan.
Factors to consider before deciding on EMI payments
Here is a list of the factors that you must note before signing up for an EMI payment system.
- Monthly income: The most important factor that you must take into account when choosing an EMI amount is your monthly income. Ideally, your EMI amount must not exceed 40% of your net income. This is a general thumb rule. You can assess your financial commitments and fix your EMI amount. We do not recommend you live on a stringent budget for a long period. It is not sustainable in the long run.
- Financial obligations: Your fixed-obligations-to-income ratio (FOIR) is very important when it comes to fixing your EMI amount. If you have multiple ongoing loans or other debts, you must factor in those obligations when deciding on EMI payments. It is important to ensure that your total EMI amount and other financial commitments do not exceed more than 60% to 70% of your net income.
- Emergency funds: Always set aside an emergency fund when planning your expenses before availing of a loan. Ideally, one should have 3 to 6 months of living costs saved up and kept aside as an emergency fund. Medical emergencies can happen anytime, and you do not want to scramble for money in a life-threatening situation.
- Savings: While deciding on your EMI payments, factor in your long-term goals. Do you have any major life events coming up? Would you require to take out more loans in the near future? You can plan your expenses in a way that you use up to 40% of your income on paying EMIs and save up to 20% of it to contribute towards your long-term financial goals.
- Lifestyle expenses: It is important to consider lifestyle expenses before setting an EMI budget. You must not compromise on entertainment expenses or never eat out with friends just to pay off your EMI. As mentioned before, it is not sustainable to run on a stringent budget and pay multiple EMIs every month.
- Interest rates: Your EMI amount can change significantly depending on your lender’s interest rates. Make sure to shop around for lenders before choosing one for you. Even if you are sure you will receive a handsome salary spike in the next couple of years, it is best not to rely on that and select an EMI system based on your current net income.
One of the best ways to calculate if you can afford to pay the EMI dues is to use an EMI calculator online. Andromeda is one such financial platform that offers an EMI calculator for free. You have to enter the loan amount you want to borrow, the interest rate, and tenure, and the calculator will display the EMI amount.
The Andromeda EMI calculator also shows a proper breakdown of the principal and interest components of the EMI amount to help you make an informed decision. Your EMI amount will be deducted from your monthly income for possibly years to come, depending on the type of loan that you have applied for. Make sure to think twice and consult with financial experts, if you hit a roadblock before signing up for an EMI plan.