Well, Are you planning to buy a House? Or Are you planning to buy a Car? Or Something Else. OK that’s absolutely fine. But what is the “Big Question” here. The big question here is your Affordability. It is the most important factor that you have to analyse before buying a big ticket size asset.
Invariably we opt to take a loan if we do not possess the required funds. As taking loan is one of the easiest and surest ways to fund your requirements, it seems appropriate to get a loan whenever we are in the need of money.
Though it may seem that taking a loan would solve your problem, but is it actually right? Here you have to see whether you are in a position to actually repay the loan installments.
And most importantly before taking up a loan you have to ask yourself , “How much Loan Can I Afford?” So the critical question for you is can you afford to take a loan. In the ongoing post we put forward an analytic viewpoint so as to figure out how much loan would be enough for you. The purpose is to help you stay financially fit and fine so that you are able to lead a happy and prosperous life instead of living a debt burned life.
Loan Affordability centers around the three basic pillars of personal financial management. One is your overall earnings that is your income, the other is your total expenses and the last but not the least is your overall savings. Loan Affordability actually means how much loan you can take without affecting your normal life.
So in order to have an effect on your Loan Affordability, you have to juggle up your income resources, overall expenses and also savings. In a way you have to manage your income, expenses and savings.
Lets take an example to illustrate and explain it to you.
Suppose you are planning to buy a car. You analyse your financial position and find out that you do not have enough funds and so would require a loan to buy the car. Now one way can be to apply and take the loan without taking a note of your present financial position. The other way is to first find out that can you afford to take a loan or rather find the answer to “How much Loan Can I Afford?”
You should go for taking up a loan when you find out that you can really be able to pay back the loan installments without any problem. In a sense, you can afford to take a loan.
But what are the actual parameters which let you decide that you should take a loan or you should not take a loan. Let us find out the answers.
Taking our example of buying a car, let us find out when it is feasible for you to take up a loan to buy the car. Let’s suppose that you require a loan for which the monthly installment is $100. That’s fine. But then you see your income and expenses, and find out that you are saving just $100 per month. Though $100 per month saving would be sufficient to repay the loan installment but it is not the level of saving which lets you “Loan Affordability”.
Here, the level of saving exactly matches the loan installments and actually you are saving nothing for yourself. Not even savings for Emergency Fund. In this scenario you should not go for taking up a loan. But, let’s say if you are saving $120 per month, then in such a case even if you go for taking the loan, you are still left over with $20. This amount, though small is still good enough to contribute to your Emergency Fund.
So as we have seen above, you should be left with a minimum net savings after you have paid the loan amount. You can set the level of net savings you should possess. It can be $20 or $50 each month. The final effect would be that you should be able to save for your Emergency Fund. This way you can come to know “How much Loan Can I Afford”.
The above example illustrates one of the several situations that might actually exist. But you should always take care to find out your net savings after paying your loan installments and find out “How much Loan Can I Afford”, before actually taking up the loan. Remember it is always easy to take up the loan than to repay it.