Financial freedom is a goal that many Indians aspire to achieve. One key step towards this goal is understanding and mastering your borrowing power. By using your borrowing ability wisely, you can unlock new opportunities and create a secure future. In this blog post, we’ll explore how to master your borrowing power, the importance of various financial ratios, and work towards financial freedom.

Understanding Borrowing Power

Borrowing power is the amount of money a lender is willing to lend you based on your financial situation. It depends on factors like your income, credit score, existing loans, and the loan terms. Knowing your borrowing power helps you make smart decisions and avoid borrowing too much.

The 5 Cs of Borrowing

Here are the 5 Cs lenders use to evaluate borrowers in India:

1. Character: Lenders check your credit history and reputation to see if you’re reliable.
2. Capacity: This is your ability to repay the loan based on your income and other financial commitments.
3. Capital: Lenders look at your assets and net worth to see how financially stable you are.
4. Collateral: Collateral is an asset you pledge as security for the loan, like a house or car.
5. Conditions: This includes the loan terms and the overall economic situation that could affect your ability to repay.

Why financial ratios are important for you

To master your borrowing power, it’s essential to understand and use the next financial ratios:

1. IIR (Interest to Income Ratio):
   • What It Is: This ratio measures the portion of your income that goes towards paying interest on loans.
   • Importance: A lower IIR indicates that less of your income is being spent on interest. This leaves more room for other financial commitments and savings.
2. LCR (Loan to Cost Ratio):
   • What It Is: This ratio compares the loan amount to the total cost of the project or purchase.
   • Importance: A lower LCR suggests that you are borrowing a smaller portion of the project’s cost. This can make lenders more confident in your ability to manage the loan.
3. FOIR (Fixed Obligation to Income Ratio):
   • What It Is: This ratio shows the percentage of your monthly income. It is used for repaying existing loans and other fixed financial obligations.
   • Importance: A lower FOIR indicates a higher capacity to take on additional loans. A higher FOIR means that a significant portion of your income is already tied up in existing obligations.
4. LTV (Loan to Value Ratio):
   • What It Is: This ratio compares the loan amount to the appraised value of the asset being financed.
   • Importance: A lower LTV means that you have more equity in the asset. This can result in better loan terms. It can also lead to lower interest rates.
5. DTI (Debt-to-Income Ratio):
   • What It Is: This ratio measures the percentage of your income that goes towards paying off debts.
   • Importance: A lower DTI indicates that your debt is at a manageable level compared to your income. This makes you a more attractive borrower to lenders.

Tips to Increase Your Borrowing Power

1. Maintain a Good Credit Score: Pay your bills on time. Reduce debts. Avoid unnecessary credit inquiries to keep a high credit score.
2. Lower Your Debt: Pay off existing debts and avoid taking on new ones to improve your borrowing power.
3. Save for a Down Payment: Having a good down payment can increase your borrowing power and secure better loan terms.
4. Increase Your Income: Consider freelancing. Keep idle property on rent. Make other investments that will generate regular streams of cash. These will boost your overall income.
5. Choose the Right Loan: Compare different loan offers, interest rates, and repayment options to find the best fit for you.
6. Set Aside Extra Funds for Principal Repayment: Each year, allocate some additional amount to repay directly to the principal. This helps reduce the loan tenure and overall interest burden.
7. Add a Female Co-borrower: Many banks offer interest rate discounts to female co-borrowers. Adding a female co-borrower can help you secure a lower interest rate and improve your borrowing power.

In the end….

Mastering your borrowing power is key to achieving financial freedom. By understanding the factors that influence your borrowing ability and making smart decisions, you can create a secure financial future. Remember, the key to financial freedom is managing your finances wisely and making strategic choices that align with your goals. In the end it is the basics which is equally important to make smart borrowing decisions

• Borrow Only What You Need: Don’t borrow more than necessary to avoid financial strain.
• Understand Loan Terms: Read the fine print and fully understand the loan terms before committing.
• Create a Repayment Plan: Budget for monthly payments and set aside funds for unexpected expenses.
• Seek Professional Advice: If you’re unsure, consult a financial advisor for personalized guidance.