It has become easier to get a loan these days. With good online loan providers like Credy, there is a chance that you can end up borrowing more than you can repay. Drawbacks of overborrowing are:
- High-interest costs, processing & late fees
- Adverse impact on credit score
- Increased vulnerability - imagine losing a job; if you have 5 open loans you will be in much more stress than if you have 1 open loan.
- Debt trap - it is easy to get into a debt trap where you pay one loan or EMI with another! This is dangerous and almost always results in a default.
So how can you tell if you are overborrowing? Calculate your Loan Burden score in 3 simple steps:
- Calculate net take home salary per month after all deductions. Call this A.
- Calculate total EMI you pay per month for all your loans combined. Also include loans that have been disbursed but EMIs haven't started yet. Call this B.
- Calculate your total outstanding credit card bill and multiply it by 0.05 i.e consider 5% of that as your monthly obligation. This is typically what lenders do. Call this number C.
Then, Loan Burden Score = ( B + C ) / A
E.g. if your net take home salary is Rs 30,000, your total current EMIs are Rs 4,000 and credit card outstanding is Rs 1,00,000, your Loan Burden=(4000 + 5% of 1,00,000) / 30,000=9000 / 30000=30%.
If the score is more than 50, you have a high loan burden and you shouldnot take further loans or credit cards
If the score is between 30-50, you have a manageable loan burden. You should not take more credit cards and you should only take really essential loans.
If the score is below 30, you have a healthy loan burden. You can take more loans or credit cards but must repay on time.
We hope this information was useful! Get many more such relevant tips using Credy Watch - our free product to help you improve your credit score.