12.05.2022
WHAT SHOULD BE THE INCOME IN ORDER TO REPAY A LOAN EASILY
Over the years, many clients have asked themselves questions such as: "Will I be approved for this loan", "What installment will they approve for me", "What amount will the bank agree to grant me", etc. In reality, however, what the bank is ready to take from us as a monthly loan expense and what we are willing to set aside is a question that often diverges. Practice shows that banks are willing (with stable incomes) to provide financing in an amount higher than advisers recommend.
The recommendation of the banks
From the bank's point of view, most require the installment on the loan you want from them plus the installments on your current loan products (if you have any) not to exceed 45-60% of the net monthly income of the applicant (s) (if more than one). Exceptions are made in the debt-to-income ratio, even up to 70% at some banks.
The recommendation of the consultants
Credit counselors as well as financial planning experts recommend that this ratio, which measures the healthy level of indebtedness, should not exceed 40% of the net monthly income of the family. Of course, if the income is different in different months, it is advisable to make calculations based on the average for the last 12 months.
For example:
With an average monthly income (the total amount of net income divided by the number of months, in case 12) of BGN 1,750, the total amount of liabilities on all loans should not exceed BGN 700 or 40% of the average monthly amount.
What kind of loan can a borrower with an average level of income according to NSI data afford?
According to NSI data for the fourth quarter of 2021, the average total gross income per person is BGN 1963.60, which for an employee (born after 1960) is BGN 1523 net remuneration. If we use these data, applying the above methodology for applying the principle of reasonable (healthy) level of indebtedness, the total monthly value to all creditors should not exceed BGN 609. This example is for the purposes of calculations and representative, without claiming for accuracy.
From the point of view of borrowers, it is worth thinking, "Okay! I will set aside a certain amount of my monthly income for loan installments/loans. But will I be able to cover my other fixed expenses (utility bills, food, entertainment, etc.) with the rest? ". You should not neglect questions related to whether you will be able to be regular payers and if the bank in objective circumstances raises the interest rate, respectively the monthly installments on the loans.
Basic recommendation
Expenditure on your loans should be as low as possible as a percentage of household income. This will give you the comfort of not worrying about monthly installment increases. It will help you accumulate liquidity buffer faster. You will not have to "tighten your seat belts" and deprive yourself of pleasures that bring joy to you and your loved ones.
Always try to have a liquidity buffer, popularly known as "white money for rainy days" in the amount of at least 6 monthly household expenses. This will help you to be financially secure in the event of unforeseen surprises (even if these costs are related only to happy occasions).
And remember! Whenever you feel "overly wealthy" and your savings significantly exceed the recommended liquidity buffer, you can repay your loans early (in part or in full), with minimal or no fees.
