Before applying for a loan, think long and hard about the ideal loan amount you should aim for. You don’t want to overborrow and pay unnecessary interest or under-borrow and compromise on meeting the purpose for which you’re taking a loan. For example, when you avail a home loan, choosing the right loan amount can help you create a budget for your property search too. While you may dream of owning a luxurious villa in Goa, considering the cost and your income, should you really apply for the loan amount you need to buy it? After all, the objective is to own your dream home and not to invite trouble by landing yourself in a debt trap. If this means you need to look for a 2 BHK over a 4 BHK, so be it.
By choosing your loan amount beforehand, you will be able to service your debt in a more organised and stress-free manner, and manage your lender’s expectations well too.
Here’s what to keep in mind when choosing the right loan amount.
The Rate Of Interest You Are Offered
The total interest you shell out is directly proportionate to the interest rate charged on the loan. The higher the interest rate, the higher is your overall interest payment. With a nominal interest, you can afford to take a higher loan amount. However, if you are able to secure rates that are high, restrict your loan amount. Before applying for a loan, do some research on the prevailing interest rates offered by various lenders. Make a prudent decision in choosing between fixed and floating interest rates by studying interest rate fluctuations in view of the prevailing and forecasted economic conditions. This will help you choose the right loan amount.
Your Income And Repayment Capacity
Your EMIs can claim a large stake of your monthly income. So, it is very important to borrow only how much you afford to repay. You may think a higher income eases repayment, but don’t rely on that just yet. Consider other monthly obligations like credit card dues, your children’s tuition fees, your parent’s healthcare expenses, and other fixed expenses that naturally reduce your available income. Keeping all this in mind, use an online EMI calculator to arrive at an EMI amount that is comfortable for you, and choose your loan amount accordingly.
Your Purpose of Borrowing
You may often notice that your emotions cloud the real figure you want to or need to borrow. If you are taking a loan for your daughter’s overseas education, are you inflating the cost of travel too much or thinking of using the money for other reasons? If you are borrowing for your second home purchase, are you not calculating the cost for stamp duty, registration and broker’s fees? Compute the actual reason why you are taking the loan and then check your savings, review your investment portfolio, and see your fixed and variable expenses. Compare all these to arrive at the right loan amount.
For instance, if you have savings in the bank and multiple investments that mature at different timelines, you can take on a higher loan amount confidently. If there’s not much financial backing you have, be restrained in choosing the amount. You know that not paying EMIs on time, will result in an EMI bounce charge, a penal interest being charged to you, and a dip in your credit score. Why risk it when you don’t have to?
Now that you know how to choose the right home loan amount, start by using the online EMI calculator, which helps you in arriving at an affordable loan amount accurately and instantly. This will make your borrowing journey more informed and help you tread carefully when you need to.
The writer is CEO, BankBazaar.