Welcome to Topkredit.lv, where we simplify all complex lending and investing issues. In this article, we will focus on one of the points lenders write in small capitals: “Your monthly credit expenses must not exceed 40% of your income”.
Where does this figure come from? Why is it so important that the loan does not exceed half your salary? How is this calculated? The answers to these and other questions can be found in this article. This rule is a key criterion for assessing you as a borrower and practical advice on staying financially stable.
The balance between consumer credit and income
Why limit loan repayments to almost half of my salary each month? Firstly, it ensures that after making your monthly payment, you are left with most of your income (60%) for other necessary expenses and savings. This balance helps you avoid the trap of over-indebtedness, where repaying your loan would be very costly.
This creates stress and limits your ability to cover other necessary expenses. The 40% condition is particularly relevant in the Latvian consumer credit environment. This limit is an essential safeguard to ensure that the borrower is not overburdened with debt and can maintain a healthy budget.
How did the cap on credit spending come about?
Over the last 10 years, the demand for consumer credit in Latvia has grown. It is used for various purposes, from unexpected expenses to car purchases. This trend could not go unnoticed by law enforcement authorities, so the government started thinking about creating a common practice for credit institutions.
Thus, today, general guidelines for lenders have been developed, detailing how to assess the ability of borrowers to repay the desired loan. They also state that monthly loan repayments should be at most 40% of salary.
In addition, it includes all the calculations and other guidelines that can be used to judge how lenders assess you. Below, we will look at concrete examples of how banks and creditors follow these recommendations when granting personal loans to their customers.
Flexible Bino.lv following the 40% rule
As a friendly non-bank lender, Bino offers credit lines from €50 to €5,000. Thanks to its fast and simple application process, it is very popular with customers. However, it is essential to note that the maximum interest rate achievable on a loan from Bino.lv is 50.23% and is set individually.
For example, you have borrowed €500 from them. Let’s assume you have the minimum wage, i.e., 700 euros. Under these circumstances, your monthly loan payment should not exceed €280 (40% of your expected monthly salary of €700).
This means you can pay almost €300 every month to the lender. This means you will repay the loan within 2 months, as the Bino credit line does not have a specific repayment period. This advantage makes this lender a good option for short-term and small loans.
Trusted SEB bank limiting your expenses
SEB Bank, on the other hand, does not offer personal loans of €500. Its loan amounts start at €1 000 and increase to €20 000. However, with an annual interest rate of between 8 and 30 percent, SEB Bank is the right choice for those who need a larger loan amount, subject to a 40 percent budget condition.
For example, according to SEB’s calculator, if you take out a loan of €10,000 with an average annual interest rate of 15%, the monthly repayment could be between €150 and €800. The choice of a suitable term should be based on your salary. For example, if our net income is €700, the monthly repayment should not exceed €280, meaning the average repayment term will be 3.5 years.
Guide on how to calculate loan payments correctly
We have already seen how to calculate the loan term and the monthly payment based on your salary. However, you need to consider a few more nuances to ensure that your loan repayments fully comply with the 40% rule and that a large part of your salary remains for other purposes.
To reinforce the rule of keeping loans to 40% of your salary, let’s take a step-by-step look at the intelligent calculation of credit payments:
- First, it’s essential to determine your salary. Remember that lenders take into account net income, not gross income. It is also worth understanding whether a particular lender considers initial or disposable income, i.e. after utilities have been paid.
- In the second step, we multiply the income we have earned, whether ordinary or net, by 40%. And so we get less than half of the salary that can be spent on credit payments.
- Lenders offering personal loans decide on the loan amount. Take exactly as much as you need, resisting the urge to take more and more.
- If there is a calculator on the lender’s website, look at the monthly payment, which should be at most our pre-calculated amount. The fee varies depending on the term of the loan. If there is no calculator, check the repayment schedule and ask the lender to adjust it if possible.
It is important to remember that lenders include all your debts in this 40%, whether it is a car lease or a phone on credit, as well as loans from other institutions. This calculation is not just a suggestion but an essential step towards responsible borrowing in line with the guidelines set by public financial institutions.
Why this rule is important
Following these guidelines teaches you to borrow responsibly. Excessive personal loans can lead to a spiral of debt that causes stress and affects your credit rating. As a debtor, you will only have to choose so-called black loans, which are usually more expensive.
Consider taking out a personal loan with, for example, SEB or Bino.lv, you should be guided by the following calculations. For a small loan of €500, you need to ensure that your monthly payments and other financial commitments do not exceed 40% of your disposable income.
Borrow consumer loan wisely
In summary, loans can be a useful financial management tool, but it is important to borrow within your means. The 40% rule is a key guideline to help you maintain a healthy balance between credit commitments and other financial obligations.
Whether you choose Bino for small, short-term needs or SEB for more severe needs, always consider your repayment options to maintain financial harmony. This not only helps you maintain a balanced budget but also helps you lay a solid financial foundation for the future.
Es, Beatrisa Granta, Topkredit.lv veidotāja, izmantoju savu finanšu pieredzi, lai palīdzētu lasītājiem orientēties kredītu izsniegšanas iespēju klāstā un izvairīties no biežāk pieļautajām kļūdām, ņemot patēriņa un ātros kredītus.