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How much can I afford to borrow at a given income level?

By Finserv MARKETS - Aug 23,2019
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How Much Can I Afford to Borrow?

Why do people borrow?

Banks and lending institutions have catered to the financial needs of their clients for decades by lending them capital for interest in exchange. If you look at it in simple terms, somebody wants to borrow money, and someone has money they wish to lend. You get the money you need, and the lenders make money off the interest, sort of a win-win situation. You usually borrow due to a shortage of cash to meet your immediate or long-term financial commitments. Listed below are some reasons why you may want to borrow money.

1.Purchasing an asset

This is the most common reason for borrowing money or availing a loan from lending institutions. You may want to purchase a home or a vehicle, and you may be falling short of cash to buy it upfront. Availing home loans and vehicle loans are credible solutions to arrange for these assets. A Bajaj Finserv two-wheeler loan, available on Finserv MARKETS, offers affordable rates of interest. If you are looking to buy your first home, you can avail a Bajaj Finserv Home loan up to Rs. 3.5 crore and 50% top-up loan of your sanctioned loan amount on Finserv MARKETS. It also offers exclusive home loans to professionals like doctors and chartered accountants. Similarly, you can also apply for Bajaj Finserv Two and Three Wheeler loan at Finserv MARKETS, if you want to purchase a motorbike or three-wheeler without worrying about the running cash flow.

2.Setting up a business

Starting a new business requires bulk investment in cash, and your savings may barely be sufficient even as seed money. In such cases, you may want to avail a small business loan to generate enough liquidity to strengthen your business. Most financial institutions lend higher loan amounts at handsome rates of interest of business loan to meet your business needs. For instance, the Bajaj Finserv Flexi Business loan, available on Finserv MARKETS, offers upto Rs 30 lakh at low business loan interest rates, free of any collateral. It also offers business loans for doctors and business loan for chartered accountants to help them set up their professional practice.

3.Consolidation of Other loans

Suppose you have a personal loan and a home loan, and their EMIs are taking up a major chunk of your monthly income. It would make sense to clear your personal loan by borrowing a top-up amount on your home loan like Bajaj Finserv Home loan at Finserv MARKETS and consolidate into a single loan. This not only eases the rigour of paying two EMIs but also allows you to pay a single EMI at existing home loan interest rates. So, if you are already burdened with several existing loans, it would be a better idea to borrow and consolidate them into a large single loan.

3.Meet miscellaneous needs

You may also want to borrow to fulfil your immediate miscellaneous needs, like a sudden medical emergency, or paying your child’s higher education fees or to manage your daughter’s wedding expenses. You can borrow by availing either a personal loan or a gold loan or even a loan against your property. In situations like these, you can borrow at Finserv MARKETS by applying for Bajaj Finserv Flexi Personal loan, or Bajaj Finserv Gold loan or Bajaj Finserv Loan against property to meet your miscellaneous needs.

How much can you afford to borrow?

While borrowing can meet your needs, it is important to know the amount of money that you can afford to borrow for your given income level. Your borrowing limit is largely decided by two key parameters – one, your credit score and two, your debt-to-income (DTI) ratio. A majority of banks and lending institutions account these two parameters to lend you a loan for your given monthly income.

  • Credit Score
  • Monthly Debt-to-Income (DTI) Ratio

1.Credit Score :

A credit score is usually a three digit number, based on analysis of your credit history. In other words, it is just a marker of your creditworthiness, wherein the score is a parameter in order to determine the likelihood of you repaying a debt, in full. The credit score is usually calculated by the Reserve Bank of India(RBI) licensed credit bureaus – like the CIBIL, Experian, Equifax, etc., each of which uses its own algorithm to arrive at the scores. An ideal credit score must range between 300 and 900. A higher credit score does not mandate a sanction of a guaranteed loan amount. However, the higher credit score, the higher the chances of the lender’s trust in you repaying the loan. It is advisable to check your credit scores regularly to rule out any possibility of lower scores or identity theft.

2.Monthly debt-to-income Ratio (DTI) :

Your debt-to-income ratio, or DTI, compares your debt payments to your income on a monthly basis. To calculate your debt-to-income ratio, add up all the payments you make towards your debt during an average month. That includes your monthly credit card payments, car loans, other debts (for example, payday loans or investment loans) and housing expenses—either rent or the costs for your mortgage principal, plus interest, property taxes and insurance (PITI) and any homeowner association fees.

DTI = Total Monthly Debt Payments * 100

Gross Monthly Income

A good DTI ratio generally needs to be below 43%. In fact, the lower your DTI, the better, since many lenders prefer ratios below 36%.

Conclusion

Lenders look at multiple comforts in your application, and credit score, DTI ratio are just two, but key parameters to measure your ability to repay. Factors like your profile, your educational background, number of years in service, number of dependents, income, savings, other assets, the property you choose to buy and many more, in addition to your credit score and DTI ratio are also considered by the lender to gauge your affordability to borrow. So, it will be wrong to say that one gets a better deal just for great credit score and lower DTI ratio.

You can also know about how to get a personal loan with low CIBIL score.

Finserv MARKETS, from the house of Bajaj Finserv, is an exclusive online supermarket for all your personal and financial needs.  We understand that every individual is different and thus when you plan to achieve your life goals or shop for the gadget of your dreams, we believe in helping you Make it Happen in a few simple clicks. Simple and fast loan application processes, seamless, hassle-free claim-settlements, no cost EMIs, 4 hours product delivery and numerous other benefits. Loans, Insurance, Investment and an exclusive EMI store, all under one roof – anytime, anywhere!

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Bajaj Finserv Direct Limited ("BFDL"), erstwhile Bajaj Financial Holdings Limited is a registered corporate agent of Bajaj Allianz Life Insurance Company Limited and Bajaj Allianz General Insurance Company Limited under the IRDAI composite registration number CA0551 valid till 10-Apr-2021. BFDL also renders services to Bajaj Finance Limited (‘BFL’) and Bajaj Housing Finance Limited (‘BHFL’) (referred hereinafter as ‘Lending Partner’) in sourcing of customers, providing preliminary credit support activities, fulfilment services and post-acquisition customer services related to lending business. Registered Office: Bajaj Auto Limited Complex, Mumbai – Pune Road, Akurdi, Pune – 411 035 CIN: U65923PN2014PLC150522