The Golden Rule of Borrowing: How Much of Your Salary Should Go Towards Loans?
Borrowing money can be a smart financial move when done wisely. Whether it’s for a home, car, business, or personal expenses, loans help achieve important financial milestones. However, excessive borrowing can lead to debt traps, financial stress, and poor credit health.
So, how much of your salary should you allocate toward loan repayments? Let’s break down the golden rule of borrowing, understand debt-to-income (DTI) ratios, and explore strategies to manage your finances effectively.
1. The 50/30/20 Rule: A Strong Financial Foundation
A widely accepted budgeting principle is the 50/30/20 rule, which suggests:
🔹 50% of income for essentials – Rent, food, utilities, transport, etc.
🔹 30% for discretionary expenses – Entertainment, shopping, travel, etc.
🔹 20% for savings & investments – Retirement funds, emergency savings, debt repayment, etc.
Where do loan EMIs fit in? Ideally, your loan repayments should come from the 20% savings & investment portion, ensuring you don’t compromise on essentials or lifestyle needs.
2. The Golden Rule of Borrowing: 40% Debt-to-Income Ratio
The Debt-to-Income (DTI) Ratio helps determine how much of your income should go toward loans.
Formula to Calculate DTI Ratio:
DTI=(Total Monthly Loan EMIsTotal Monthly Income)×100DTI = \left( \frac{\text{Total Monthly Loan EMIs}}{\text{Total Monthly Income}} \right) \times 100DTI=(Total Monthly IncomeTotal Monthly Loan EMIs)×100
Recommended DTI Breakdown:
✅ Ideal Scenario: DTI ≤ 30% (Financially comfortable)
✅ Moderate Risk: DTI 30% – 40% (Manageable, but higher risks)
❌ High Risk: DTI > 40% (Debt burdened, risk of financial strain)
Example Calculation:
🔹 Monthly Income = ₹1,00,000
🔹 Total Loan EMIs = ₹30,000
🔹 DTI = (30,000 ÷ 1,00,000) × 100 = 30% ✅ (Healthy borrowing level!)
Golden Rule: Keep your total EMI payments below 40% of your monthly income to ensure financial stability.
3. How Much Loan Can You Afford Based on Your Salary?
Home Loan Affordability:
Most banks follow the 40% EMI rule, meaning your home loan EMI should be within 40% of your net salary.
| Monthly Salary | Maximum Affordable EMI (40%) | Approximate Home Loan Eligibility (20 Years @ 8% Interest) |
|---|---|---|
| ₹30,000 | ₹12,000 | ₹15 – ₹20 Lakhs |
| ₹50,000 | ₹20,000 | ₹30 – ₹40 Lakhs |
| ₹1,00,000 | ₹40,000 | ₹80 Lakhs – ₹1 Crore |
Personal & Auto Loan Affordability:
For personal and car loans, lenders generally allow a 30-40% EMI-to-income ratio.
Tip: Always keep at least 60% of your salary free for living expenses and savings.
4. Smart Strategies to Borrow Responsibly
🔹 Borrow Only What You Need: Avoid over-borrowing, as higher loans mean higher EMIs and more interest paid.
🔹 Choose the Right Tenure: Shorter tenures have higher EMIs but lower interest, while longer tenures reduce EMI but increase total interest costs.
🔹 Consider Interest Rates & Charges: Compare multiple lenders to secure the lowest possible interest rate.
🔹 Maintain a Good Credit Score: A 750+ credit score improves loan approval chances and gets you better interest rates.
🔹 Keep an Emergency Fund: Having at least 6 months of expenses saved ensures you won’t default in case of job loss or financial emergencies.
🔹 Avoid Multiple Loans: Too many loans can burden your finances and lower your creditworthiness.
5. How Fair Finance Helps You Borrow Smartly
At Fair Finance, we assist borrowers in:
✅ Choosing the right loan based on income and expenses
✅ Calculating the ideal EMI to avoid financial stress
✅ Comparing multiple lenders to secure the lowest interest rates
✅ Improving credit scores for better loan eligibility
📞 Struggling with loan decisions? Apply for a paid consultation now!
Final Thoughts
Understanding how much of your salary should go towards loans is crucial for maintaining financial health. Following the golden rule of borrowing (keeping EMIs below 40% of income) ensures you can repay loans comfortably without affecting your lifestyle.
Borrow wisely, plan strategically, and secure your financial future! 🚀
Take the Next Step!
Looking for the right loan but unsure which one suits you best? Fair Finance offers expert consultation to guide you through your loan options and ensure you make an informed decision.
📞 Contact Us Today for a free loan consultation and explore the best deals tailored to your financial needs!
👉 Visit our 🌐 website: www.fairfinance.in
📧 Email us: fairfinance.in@gmail.com
📞 Call us: +91 9123309198
