Till few years back, you had to visit branches and offices of financial institutions like banks, NBFCs to get all your loan related questions answered. How much loan will you get, what is the interest rate, what are tenure options, can you reduce your EMIs, etc.?
But technology has made it very easy to find answers to these questions now. You just need to access the easily available online EMI calculators through your computers or mobiles. And you will have all your answers.
But before that, one thing to understand here is that lenders in general have an upper cap on the amount they lend. This cap is set at 40% for EMI-to-Income ratio. This means that the total of all your monthly EMIs should not be more than 40% of your income. So at a salary of Rs 50,000, your total EMIs should not exceed Rs 20,000 (40% of your income).
Now when you use EMI calculators, you need to provide 3 inputs:
- Loan Amount
- Interest Rate
- No. of Months
Now you already know how much loan you want. Isn’t it?
As for the interest rate, it differs from loan to loan. A home loan might cost 8-10%, personal loan 13-20%, business loan 13-18% and used car loan about 14-18%.
Tenure too differs from loan to loan.
As soon as you provide these data points and press the submit/calculate button, the EMI calculator will tell you the exact loan EMI, total interest to be paid and total amount you need to pay.
Now the EMI result you get should be compared with your income. Let’s say that the EMI for the loan you want is Rs 24,000. But your monthly income is Rs 40,000. This means that EMI will be 60% of your income. This is unfeasible and your loan will be rejected (because of 40% thumb rule that lenders have).
What are your options? You can either reduce the loan amount or you can increase the tenure.
Let’s take a small example to better understand this. Suppose your salary is Rs 40,000. Suppose you want to take a personal loan of Rs 5 lac. The interest rate applicable is 15% and you want to opt for a 3-year tenure. Now EMI in this case would be about Rs 17,500.
This means that EMI-to-Income ratio is 44%, i.e. above lender’s loan approval threshold. Now if you reduce the loan amount or increase the tenure, your EMI will reduce as follows:
- Tenure increased to 4-years. EMI = Rs 14,200 (i.e. 36% of income)
- Tenure increased to 4-years. EMI = Rs 12,100 (i.e. 30% of income)
- Loan decreased to Rs 4 lac. EMI = Rs 14,100 (i.e. 35% of income)
So as you can see, you can change the inputs of the calculator to understand exactly how much you can borrow and for how long, given your repayment capacity based on your income.