At times, you may require additional funds in order to deal with an unforeseen expenditure, arrange a wedding, renovate your house, or cater to some kind of urgent monetary requirement. In such cases, availing of loans would be a good idea, but how much should you borrow? Borrowing less might not help you solve your problems, whereas borrowing an excessive amount of money could add to your EMIs and interest expenses.
What you should do instead is borrow only the required amount of money that you will be able to easily repay back. When applying for any kind of loan, whether it be a personal loan, a housing loan, or any other form of credit, it is wise to take into account the factors of your monthly income, existing EMIs, expenses in the house, etc.
This article is going to help you find out how to calculate the right amount of loan that you can afford to borrow.
How Much Loan Is Actually Needed?
People rarely think about figuring out “How much personal loan should I take,” as they just take the amount that they see on the approval screen. That’s the risk that a lender will take, not the amount that a household can afford to pay back. They very rarely match and this is where the trouble often comes in. However, it is useful to start with your exact requirement. Whether it is medical bills, repairs or you want to bridge a gap between salaries.
Calculate the Expense
It’s always good to write down exactly how much you need, rather than rounding up your figure. Usually medical bills, tuition and repair costs will have an invoice or a quote showing how much they are. Therefore it is unlikely you will ever need to guess. This is the starting point of borrowing and you want to get this right. Everything else, your savings, EMIs, budget, will become clear once you know the exact amount you require.
Accounting for Available Savings
Deduct any savings. If you have half of the loan amount saved then there is no point getting the full amount. Being honest with yourself will mean you will get a much smaller loan amount than you may have thought. You also get some peace of mind.
Existing EMIs
Anyone with an existing car loan, credit card debt or something else with an EMI will need to take this into consideration. Lenders will also take this into account. However they will look at how risky it is for them rather than how comfortable the household is. The household will have two existing EMIs and adding another can really eat into your monthly income. Knowing how much you need to borrow will help you to look at the whole picture.
Regular Household Costs
The monthly budget will tell you honestly if you can afford the loan amount. Most households will have rent, food, bills and existing EMIs. Whatever is left over after these things should be where your new EMI goes. Financial advisors recommend that no more than 40% of your monthly income should go towards an EMI. This is a general guideline and will vary depending on the individual and how much of their monthly income is going towards other loans.
It is best to perform a quick mental review before coming up with a final number:
- The exact expense amount, backed by a bill or quote, not a rounded guess
- Savings that can realistically be set aside without creating a new problem
- Every existing EMI already running, added together, not viewed in isolation
- What is genuinely left in the monthly budget once fixed costs are paid
- Whether a shorter tenure or a longer one better matches income stability
Loan Amount and Tenure Decide the EMI
Once you know how much you are spending and how much you need to borrow you will need to decide how long you want to borrow the money for. A shorter time to pay back will mean you have a larger monthly payment but you will pay less in interest. A longer time to pay back will mean you will have a smaller EMI but you will pay more in interest over more months. This is why you cannot plan your EMI without knowing your loan amount.
A Quick Example Worth Running First
If you were to borrow 65,000 with a little processing fee for 9 months with roughly 3% monthly interest your EMI will be around 8000. You will pay a decent amount in interest. If you were to borrow the money for 18 months your EMI will be less but you will pay more. This will depend on your monthly budget.
Borrowing Needs Are Not Always About the Full Amount
Sometimes you will not need to borrow the full amount you have been approved for. It is cheaper to borrow less so you can pay it off faster. Sometimes you may want to borrow a little more to give yourself a little padding. Again, make sure that the EMI will still fit into your budget comfortably.
Building Loan Repayment Into a Plan, Not a Guess
The best way to loan repayment is to treat them like any other fixed monthly payment. If you miss out or are late paying your EMIs this will affect your credit score meaning you will pay more or struggle to get any further loans. Try to make your repayment date shortly after you have received your salary. This will reduce the risk of you not having enough. Often this is more important than the interest rate.
Financial Planning Beyond This One Loan
Every loan taken sits inside a larger pattern of financial planning, whether or not it feels that way in the moment. A single well sized loan, repaid on schedule, barely dents long term goals. If it is taken without keeping in mind the monthly budget or the existing EMIs, a poor-sized one can easily derail one’s savings, delay other goals and lead to a vicious cycle of debt. Adopting a long-term perspective of financial planning, rather than focusing on individual loan transactions, will lead to improved results in the long-term.
Using the Right Tools to Decide With Confidence
You won’t need to use a calculator and pen to work this out. Apps such as Olyv will show you how much your EMI, overall interest and repayment plan will be. You can try different repayment periods and loan amounts. A few things worth checking inside such an app before applying:
Whether;
- it shows the full EMI breakup, including processing fees, before confirming
- it tracks credit score changes alongside active loans and EMI due dates
- repayment tenure can be adjusted to see the effect on monthly EMI instantly
Olyv also includes tracking your credit score and reminding you when your EMIs are due. This makes EMI planning much easier. Using these tools will help you make an informed decision about your borrowing requirements.
Borrowing With a Clear Number in Mind
Almost always a person that takes a loan will have a higher limit on their loan than they should. The stress of making a decision becomes a simple one when you know the true cost, you know what you have and you’ve planned your loan repayments and budgeted to adhere to your monthly budget. The next time around when a big bill comes down, the key question is less on how much you can borrow, and more on how much you actually need to.
