How To Calculate Your Repayment Capacity Before Taking Any Loan? The 45% Rule Most People Ignore

A short-term loan can be a source of rapid support and stability when unexpected financial situations like a medical emergency, home repair or urgent expense develop. However, before applying for any loan, the question that is the most crucial has to be answered: How much can you safely borrow based on your salary without risking your financial well-being?

Repayment capacity is a defining factor that allows you to become financially secure, stress-free, and absolutely in control of your budget. Responsible borrowing is not only about getting cash but also about making sure the payment will be easy and comfortable with your income.

Let's see what steps to follow to know your borrowing limit that you can manage comfortably as per Mr. Ankit Modi, Managing Director, SalaryOnTime.

Step 1: Know Your Net Monthly Income

• First, understand the concept of net monthly income: this is the amount one actually receives after taxes and deductions. If a person earns Rs 35,000 per month and after deductions, his take-home pay comes to Rs 30,000, then Rs 30,000 becomes the actual base for making repayment decisions.
• This figure is the basis of your safe borrowing limit.

Step 2: Track Monthly Expenses

• Following that, a list of regular monthly expenses is prepared which includes rent, food, utility bills, transport, educational fees, and health care.
• Your income after all these expenses has a positive balance, which is the amount that can be safely spent on loan repayments without stressing your budget.
• Proper planning unveils the actual surplus and makes the choice easy, not difficult.

Step 3: Apply the 45% Rule

It is suggested that your EMIs should not exceed 45% of your monthly net salary, as a certain borrowing rule allows for repayments to be done easily and leaves enough balance for necessary expenditures and savings.

For example:

In cases where your net salary is Rs 30,000 every month, then 45% of Rs 30,000 = Rs 13,500.

Thus, the maximum amount you can pay monthly for a short-term loan is Rs 13,500. This method of dealing with financial crises enhances your financial stability while allowing you to draw from it.

How Banks Assess Eligibility?

Banks follow, instead, another way of assessment commonly referred to as FOIR (Fixed Obligations to Income Ratio) or DBR (Debt Burden Ratio). Usually, banks lend not more than 60% of an applicant's net income.

Example:

If Mr. A earns Rs 1,00,000 per month as take-home salary, banks may allow loan EMIs up to Rs 60,000. The rule of thumb is that 60% should go to debt repayment and the remaining 40% to meet essential living and investment requirements.

"However, personal financial capacity is relative. Each individual must gauge the ability to repay, considering lifestyle, age, and present financial obligations, besides goals related to long-term security," said Ankit Modi.

Step 4: Grasp Loan Tenure and Repayment Structure

Short-term loans, like fixed 40-day loans, are meant to solve immediate needs without the accumulation of long-term debts. These loans:

• Have a quicker payment cycle
• Do not impose financial stress for a longer period
• Completely inform about the amount to be repaid

With the shorter duration, the borrower has the opportunity to be very precise in their planning and thus save on interest by not paying unnecessary charges.

Step 5: Access the Loan Calculator

The loan calculator makes it possible for borrowers to get the repayment estimates immediately.

You just have to input the loan amount you desire and pick the 40-day fixed duration to see the total repayment amount including all fees.

"This makes it easier to confirm whether the amount to be borrowed, preferably within 45% of your salary, is going to be a comfortable fit within your budget," commented Ankit Modi.

Additional Financial Planning Guidelines

According to financial experts, the easiest way to manage a budget is by implementing the 50:30:20 rule:

• Essential household expenses would take 50% of the income
• The next 30% would go to debt servicing or rent
• The last 20% would be dedicated to investments and future planning

"Do not rely on salary increases to determine your repayment capacity. The future workforce is unpredictable, and the safe borrowing process should always be based on the current financial situation," says Ankit Modi.

In gist, short-term loans can be considered a great financial support tool if wisely applied. After going through the income, observing the expenses, the 45% rule application and the calculator used for repayments, one can borrow confidently without risking one's financial peace.