Individuals borrow a loan to meet their financial contingencies in case of a cash crunch. This finance may be used for multiple purposes like funding a marriage, fulfilling further education dreams, making international vacation plans, besides many others. This borrowed loan is then repaid along with a certain amount of interest over a period of time.
The meaning of EMI
The amount that has to be paid regularly towards clearing off the debt is known as Equated Monthly Installment (EMI). This amount comprises of two components, the principal amount borrowed and the interest. The EMI has to be repaid to the lender on a fixed date every month until the entire amount of the loan is paid in full.
EMI and income
The EMI amount is usually paid from your monthly income. Most financiers do not allow loan seekers to borrow more than 35% to 45% of the gross monthly income. This is because the balance amount is to be used for other purposes like daily expenses, investments, emergency requirements, and savings, besides others.
This 35% to 45% bracket limit is a broad figure. There are many other aspects that affect the amount that you should pay towards your personal loan EMI. In case you are a married individual who has a working spouse, the chances of repaying through a higher EMI are greater. However, the same is not the case if you have to cater to the needs of your children and your partner, who is not employed.
Another factor that affects this amount is the number of loans that you have borrowed. In case you are already repaying off any existing loan, the personal loan amount paid from your salary needs to be lower. This helps to reduce financial strain associated with repayments of multiple loans.
Tips to avoid while borrowing
Remember, a loan has to be paid regularly over the loan tenure. It is, therefore, necessary to borrow only how much you are able to afford. Do not cross the 35% to 45% limit, as paying a higher amount towards loan repayments from your income will leave you with little cash for your other needs. You may then have to compromise on your savings or meeting your daily expenses. Similarly, if you pay a very low amount, you may end up paying lesser than what you are able to afford. This, in turn, will lead to lower EMIs, thereby extending the loan duration. However, longer loan duration attracts a higher interest and leads to unnecessary financial worries about repaying the debt.
It is, therefore, necessary to maintain the perfect balance between your contribution to monthly EMI repayments, savings, and daily expenses. In case you are expecting a hike in your salary, use the extra money to pay the EMIs. It will help you repay your loan faster. In case you income increases yet further, you may keep the EMIs constant, thus helping you to comfortably repay your loan and manage your other expenses conveniently. Choosing a higher repayment amount is recommended only if you foresee a substantial increase in your salary.
Therefore, set the right limit from your salary for your EMI payment, based on your financial position. This will help to avoid any kind of financial pressure in the long run.