Owning a car and having a house are two essentials of leading a peaceful life in a metro. In many cases, people prefer paying a high EMI than paying the rent for a house. After all, owning your own house gives you and your family a form of security for the future. In a similar manner, having a car extends not only the comfort, but also the convenience of traveling at your own time schedule as and when needed. It takes away the hassle of finding a comfortable and leisurely mode of travel every time you want to reach on time or heading towards a key meeting.
With easy credit facilities available for salaried individuals, it has no longer been a far-fetched dream to own these two basic assets in your life. If you have a stable income stream, you can plan both the Car Loan and Home Loan quite efficiently within three to five years of your job.
Home Loan
Taking out a home loan would mean taking out a larger loan with longer tenure, like the PNB Home Loan can be availed for up to 30 years. This suggests that you are tied into that one loan for a very long time. Most lenders extend prepayment and foreclosure options at no or minimal costs for home loans. You can efficiently plan the early repayment for your home loan. However it is imperative to plan the repayment carefully.
A home loan can be borrowed at a fixed home loan interest rate or a floating home loan interest rate. For the former loan scheme, your EMIs are fixed, while for the latter option, EMIs will fluctuate as per market changes. With multiple loan accounts, you may find it a little difficult to manage a changing EMI every month.
Car Loan
Cars Loans are relatively small loans and most car dealers have tie-ups with various lenders. You can avail a car loan for 5 to 7 years. It is generally completely hassle free to avail a car loan as your car acts collateral. It can be your first loan as you generally do not require a credit history to avail a car loan. You can apply either through the bank directly or from the car dealer. In many cases, there is a repayment charge on the early repayment of a car loan.
Things to keep in mind when you need car loan and home loan together:
1. How to plan both loans?
If you already have a home loan and a car loan in your mind, consider planning in such a way that you take out the car loan first. Try and ensure that you are able to repay the same early and close the loan before applying for a home loan.
However if you cannot close the existing car loan, opt for a flexible repayment structure. You can choose to pay lower EMIs in the initial stage on your home loan via a step-up plan. This would give you the ease of completing the car loan without much of the financial stress. You can continue the wider Home Loan payments after closing the car loan.
- Loan and Income Ratio
The total credit bills and EMIs going out from your account should not exceed more than 50% of your income. In the current scenario, your car loan EMI should not be more than 15% of the income.
Next, you must meet the requirements of the bank.
- Credit Score
One of the major factors that financial institutions consider is your credit score. The credit score or the credit rating is calculated based on your past credit repayment history, including the discipline in repaying your past loans and credit card bills. In case there has been a default it would affect your credit rating and might lead to a loan rejection. It would also matter to your lender if you have too many personal loans and credit cards.
- DTI Ratio
The bank will also consider what part of your income is going into paying out monthly credit bills and EMIs. Especially in case of home loan application, the loan will be approved if the EMI burden is less than 36% of your net income. The bank would calculate net debt to income ratio before accepting the application.
In all; it is important to understand the implications of availing multiple loans before you opt for the same. You need to correctly evaluate your repayment capacity before adding an additional loan to your debt bucket.
You must do the mathematics right. If required, use expert advice, use online calculators and try to understand the monthly EMI burden before starting the new loan. A Debt is a responsibility that must be efficiently met