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I am from india, my idea of the question is to understand

what is the loan amount i am entitled to, what should be my plan for applying a loan, and is there any ways to reduce interest rate after a particular number of years. How good is it to prematurely close an loan.

say i have 'x' as my salary per month. if x = 40000 rupees

I am confused on how much I should be using for

  1. How much should be the ideal loan amount, with respect to my salary. let this be 'y'.
  2. How much tenure(in years) should I be looking for for payment of the loan back.
  3. If i have some savings, how much of it should be kept in hand. i have noticed that at cases there would be option from bank to deposit some amount to bring the home loan interest down after a particular number of years.
  4. If in case i am having more savings than now, should i be Close the loan pre-maturely or should i look for other investments with the extra amount. considering that in India tax exemption is available only for the 1st home loan.
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You are not entitled to a loan amount, but rather you should ask how much of a home mortgage loan you might qualify for. Different banks can have different criteria as to how much they are willing to lend you so that you can purchase a home, and for how long. –  Dilip Sarwate Feb 25 '13 at 12:57
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1 Answer

Loans: First of all this is a very broad subject. But let me give you a helping hand here.

How much should be the ideal loan amount, with respect to my salary (say 40k/month).

An ideal loan first of all is the amount of money that can be easily paid in loan installments considering your monthly income. Now the amount of loan money granted by the bank depends on various factors.

  • Your income
  • The security pledged against the loan
  • Tenure
  • Previous History (if any)

How much tenure(in years) should I be looking for for payment of the loan back?

This depends on your and well as lenders comfortability. Depending on the security pledged the lender will consider the duration of the loan. Securities like land and gold appreciates by value with time and hence you are more tend to get a loan with a higher repayment period. Securities like cars, bike, machineries etc depreciates by value with time and hence reducing the tenure of your loan period. Also from the lenders point of view by default he keeps in mind that the money lended is not gonna come back and views your loan application keeping that in mind and hence considers mostly your pledged assets and the easiness of recovery if you dont turn up to pay the loan.

Considering myself as an applicant I would consider paying off the loan as soon as possible but keeping in mind that in the worst scenario I have enough money to keep paying my installments without getting defaulted. Say if my salary is 40k INR and my comfortable payzone is 10k keeping aside 30k for my other expenses and savings, I would consider a loan with a maximum of 6k as my monthly installment and 4k for my untouched savings account that would help me pay the installments if I loose my job or any such incident.

If I have some savings, how much of it should be kept in hand. I have noticed that at cases there would be option from bank to deposit some amount to bring the home loan interest down after a particular number of years. Those are rare circumstances when a bank will ask you to pay off some principal amount to bring your interest rate down unless there are some settlement issues or the bank has to present a balance sheet to its shareholder or Central Bank with good figures. Practically you should keep in mind you are paying the same amount of interest which is on paper or even higher because the rules say that if the interest rates go up bank will raise your interest rate but if it goes down the bank might consider lowering depending on many circumstances and those circumstances never come. So yes savings are always good and you should have enough savings to pay your loan installments for the next six months and also your day to day expenses for the same duration if your income gets effected or blocked.

If in case I am having more savings than now, should I consider pre-mature settlement or should I look for other investments opportunities and continue paying the loan as it is? Considering that in India tax exemption is available only for the 1st home loan.

I love this early settlement questions. Let me ask you to read or always ask your bank or lender while you inquire about the loan for the early settlement charges. Yes most of the bank will charge you around 5% on the balance amount on early settlement of the loan.

About tax exemption, you are only given tax exemption on the installments which you pay for the loan because the bank pays that tax to the govt. instead of you. Suppose you close the loan early you do not get any tax benefit there after coz you don't have any installments to pay. So now you are paying 5% + you don't get any tax benefits.

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Hi thanks for the wonderful organised reply. One last question - do i need to watch out for something we haven't discussed in the question-answer –  Naveen Babu Mar 4 '13 at 5:19
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