EMI affordability: When does an ‘affordable monthly payment’ become unaffordable? Experts explain
The rise of easily available loan credit lines has made EMIs an integral part of household finances across the country. Starting from homes, cars, gadgets, along with other critical lifestyle products and services, borrowers are increasingly adopting EMIs in order to ensure seamless purchases and a pleasant experience of availing a facility, service or a product.
Now, consumers generally judge the affordability of a product or service by the size of the monthly instalment it demands; still, a small Equated Monthly Instalment (EMI) can also be equally daunting and misleading when viewed in isolation.
The real test of affordability and ease, therefore, is whether an individual can manage the EMI efficiently. When it leaves enough room for everything else a household actually needs to fund.
Vijendra Singh Shekhawat, CEO, Choice Finserv Private Limited, touched upon this aspect in detail, stating, “An EMI stops being affordable the moment it stops leaving room for everything else the household has to fund. The real number is not the instalment on paper; it is the borrower’s total monthly obligations set against a realistic, stable income. Stress usually builds quietly, often when a second or third loan is taken to service the first. Our job as lenders is to test that full picture honestly at the point of sanction, not to discover it after a payment is missed.”
On the part of the borrowers, this simply means that one should check their financial capacity to meet repayment obligations. The aim should be to keep the total EMI obligations in control.
The 30% Rule offers a reasonable reality check
As a matter of principle, a borrower should ensure that their total EMI obligations, after combining all personal loans, home loans, car loans, along with other forms of credit, should never be more than 30% of their monthly income. For example, if your monthly income is ₹50,000, you should try to ensure that your total EMI obligations stay within the ₹12,000 to ₹15,000 range.
Yudhajit Baul, Founder of Yudhajit Financial Services Pvt Ltd, explained this concept in detail, stating, “In personal finance, we recommend distributing income in different components such as fixed expenses, variable expenses and savings. EMI on loans forms an integral part of the fixed expenditure of a household. Ideally, EMI should be contained to less than 30% of net income to keep harmony with other commitments and, most importantly, with savings. With a dwindling savings rate, especially in urban India, which can have major long-term consequences, it is important that households do not cross ‘the 30%” affordable EMI rate as a percentage of income.”
It is critical to keep in mind that the 30% benchmark is not merely a mathematical threshold; it is a safeguard for financial resilience and a means of dealing with an unforeseen financial crisis.
When EMIs consume a large share of income, households have less room to meet emergencies, make investments, and pursue long-term economic objectives. The risk rises further when the margin declines further, and fresh loans are availed to meet pending debt obligations.
Affordability is about financial freedom
Eventually, an EMI should be carefully analysed against the entire financial picture, not just whether the next instalment can be paid. Currently existing loans, essential expenses, savings, insurance, and future economic commitments (if any) matter.
A loan is truly affordable only when repayment does not force an individual or household to sacrifice their financial security and peace of mind. The core objective of borrowing should not simply be to make today’s purchase possible. It also ensures that the borrower remains financially free in the years to come.
In a rapidly changing economic environment, where debt has a meaningful role to play, the best loan is not necessarily the one with the smallest monthly payment, but the one that leaves enough income to live, save and withstand the unexpected challenges life can throw at you.
