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What is ideal EMI to Income?

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You want to buy a personal loan or a home loan but are not sure about the amount you should apply for. It actually depends on how much EMI (equated monthly installment) you are capable of paying. There are a few factors that must be kept in mind to make sure that your EMIs do not pinch.

Income & EMI

Keep breathing space for yourself: Normally banks restrict a borrower’s EMI to 35-45 per cent of net income. This helps the borrower to meet other expenses easily and pay EMIs without any hassles. Banks do not look into gross income and consider your take home salary to decide on your ability to repay a loan.

Your EMI amount should be moderate enough to enable you to save 15-20 per cent of your salary for emergency and unforeseen expenses.

Though you may expect a handsome hike in your salary in future but you cannot solely depend on it to pay a higher EMI today.

Make an assessment of your present liabilities and expenses as well as increase in expenditure in near future, keeping in view the rising inflation. You should have enough breathing space even if your expenses go up in future.

Related Calculator – EMI Calculator For Calculate Loan EMI

Beware of hike in interest rates: You are happy to avail home loan at a comparatively low rate. But your happiness may be short-lived as you may find after a few years that your bank has hiked the interest rate. You should not rule out any such possibility and be prepared to pay higher EMIs.

Look before you leap: Once you take the plunge, there is no going back for you. Therefore, it is important to think twice before taking a final decision. Your monthly installment will eat out your monthly budget for years to come so decide for an amount which you can easily set aside. Following are the points to consider while deciding your EMI:

  • Present income and expenditure.
  • Lifestyle
  • Possibility of job loss, stagnation, increase or decrease in salary.
  • Future expenditures and retirement plans.

 

Rule of 40/100 EMI/income

EMIs make a major dent on your monthly budget, therefore, it is advisable that it should not exceed 40 per cent of your salary. The EMI limit should be restricted for the following reasons:

  • Nearly 30 per cent of the salary is spent on food, house rent and other essentials.
  • Nearly 25-30 per cent needs to be invested.
  • At least 10 per cent should be set aside for emergency situations.

Keeping these factors in mind, not more than 35-40 per cent should go as EMI.

 

The ideal EMI-income equation

The ideal equation will be when your EMI forms 30 per cent of your net income. An interest rate hike in such a case will not upset your budget. The 40 per cent limit may not be very taxing initially but higher interest may leave you in a spot.

 

Percentage may be deceptive

The basic criteria for deciding EMI is based on the percentage of the salary of an individual. But one should not take it as a thumb rule. Consider these two cases:

Case I: Raj earns Rs 20,000 per month. If we take away 40 per cent of his salary towards EMI he will be left with a meagre Rs 12,000.  

Case II: Jay earns Rs 50,000 per month. If he sets aside 40 per cent of his salary, he will still have Rs 30,000 to meet his monthly expenses.

Percentage is one of the parameters, not the only parameter to calculate your EMI. One should go by actual income and numbers.

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