What portion of your salary should you spend on loan EMIs?
Most people buy a house or a car by taking a loan from the bank, but do you know what is the maximum portion of your salary that you should spend on EMI? What is the 40 percent EMI rule? What are the disadvantages of spending more on EMIs? Among home loan, personal loan, auto loan and credit card bills, which loan should you eliminate first?
Home loan is one of the most popular loan products. As of June 2021, the home loan outstanding in India is around Rs 30 lakh crore. Generally home loan tenure goes up to a maximum of 30 years. But one private bank is offering 35-year tenure on home loan, which is a first in the industry. A person’s average working life span is usually considered between 30-32 years. So, all banks offer maximum 30-year loan tenure.
Home loan for 35 years
In the season of festivities, Yes Bank announced a limited period (90 days) offer on home loan, ‘YES Premier Home Loans’ at 6.7% interest rate with flexible loan tenure of up to 35 years at easy EMI options and zero prepayment charges with minimal documentation. This is a onetime offer and will be valid till December 31, 2021.
Normal home loan
All big commercial banks have slashed their home loan interest rates in this festive season. Private lender Kotak Mahindra Bank (KMB) offers the cheapest home loan across the industry at 6.50% per annum. It started the festive season by announcing the reduction in home loan interest rate by a further 15 basis points to 6.50% per annum up to a repayment tenure up to 30 years.
This special rate of 6.5% is for a limited period and is ending on November 8, 2021.
SBI recently slashed home loan interest rate to 6.7% irrespective of the amount and the tenure of the loan. Even balance transfer of home loans is also eligible for this special offer. The tenure of the loans varies between three years and 30 years.
Public sector banks such as Punjab & Sind bank, Bank of Baroda and PNB and private lenders ICICI Bank, HDFC Bank and others offer a low interest rate between 6.5% and 6.75%.
Expert view
Personal finance experts feel that 35-year tenure is welcome from the perspective of the customer.
“Long repayment tenure means lesser EMI burden. But eventually he/she has to bear a higher total interest burden,” said Nilotpal Banerjee.
“The tenure of 35 years is rather negative for the bank’s perspective. It means that if a person takes the loan at 25, he/she would reach 60 when the last EMI is paid. The chance of the customer running into payment difficulty and the loan turning into NPA is high,” said a former member of state level bankers’ committee of West Bengal.
He clarified that very few persons would be financially sound to take a home loan at the age of 24 or 25 years. Generally, people who are late twenties and early thirties take the first home loan. So, a 35-year might mean that the individual can run into repayment problems.
“If a person takes a loan in his/her 28th year, the last EMI would be paid when he/she is 63. If the customer retires from service at 60, how would he/she repay the loan in the last three years?” asked the former banker.