If you are facing a financial crisis or an urgent need for money, it is natural to borrow. However, it is important to realise that the loan amount should remain within comfortable range. This means one should not borrow so much money that it becomes too high to repay.
How much is too much?
It is vital to note that there are dime a doze banks, NBFCs and fintech platforms which are willing to give you personal loans at a high rate of interest. But you should be careful not to borrow more than you can afford to repay.
Typically, the borrower is expected to keep the EMI amount lower than 50 percent of monthly income, while it is better to keep it below 40 percent.
“We often tell our clients to keep their monthly EMIs below 40 percent of their income. Regardless of temptation, one should not borrow beyond their means of repayment,” says Deepak Aggarwal, a Delhi-based chartered accountant and wealth advisor.
What are the factors to consider?
There are a number of factors to consider before going ahead with a loan. These include the following:
A. Urgency of loan: Whether loan is absolutely essential i.e., whether it is for a wedding or for vacation. If you are borrowing money for something as urgent as a wedding then you should go ahead. Else, you can drop or at least defer your plan to borrow if it is meant for a luxury.
B. Rate of interest: The quantum of EMI is a function of rate of interest and amount of loan. If your loan is too small but the interest rate is too high then also the EMI can be exorbitant. So, one should be wary of borrowing money at a high rate of interest.
C. Current income: You should borrow money based on your current income instead of your projected future income. If your current income can enable you to easily repay the loan, you should go ahead with it. Conversely, the practice of raising a loan on an ‘assumption’ that your income will spike in the near future is not recommended.
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