Thus, if we read loan in Gujarati upside down, it means don’t take, and in the same way that the word Impossible itself says I m possible, in the same way the word loan itself says don’t take, although people have enough money for every need. Then what to talk about? However, the fact is that most of us have to take loans to meet our needs. Banks and NBFCs are capitalizing on this opportunity to attract consumers with attractive offers of low interest rates, timely loan approval and easy process…
Technology has changed the lending industry a lot. Online aggregators help customers find the cheapest loan, while banks on the other hand take minutes to approve and release the loan. HDFC Bank’s personal loan facility is known as Usain Bolt in the financial world. They disburse loans to their net banking customers in just 10 minutes. Although technology has changed the method of disbursing loans, the lesson of caution in taking loans remains the same. If you are not in dire need of money then there is no point in taking a loan. Or if you want to get tax benefit on the interest paid, taking a long term loan is an important decision. After considering many points, here are 10 important aspects that you should consider before taking a loan.
- Don’t take loans beyond your repayment capacity
Our forefathers have always said one thing is to stretch the sod as much as the sheet, a rule says that car loan EMI should not be more than 15 percent of your net monthly income and personal loan EMI should not be more than 10 percent. Rishi Mehra, founder of Deal4Loans.com, said that your total monthly repayments for all types of loans should not exceed 50 percent of your monthly income. Banks are betting to increase the business, in this situation it can be very easy for you to get a loan. However, you should not take a loan just because it is easily available. Before taking a loan, decide whether you can afford the loan-to-income ratio.
Here is the case of Fani Kumar from Hyderabad who has been paying the loan installments since he started working. It started six years ago with two personal loans of Rs 5 lakh each. At that time he was paying an EMI of Rs 18,000 (40 percent of his take home salary). Then in 2012, Kumar took a car loan of Rs 5.74 lakh, adding Rs 12,500 to his total monthly installments. Last year, he took a personal loan of Rs 8 lakh to pay off other loans and then a top-up loan of Rs 4 lakh to cover other expenses. Currently, he is paying an EMI of Rs 49,000, which is 72 percent of his net income. Now, with a large chunk of income going to EMIs, Kumar cannot think of retirement savings or other savings. Despite working for six years, Kumar’s net worth is still in the negative zone. So be careful not to make such a mistake.
- Keep the time frame as short as possible
Almost all major lenders offer a maximum tenure of 30 years for home loans. The longer the tenor, the lower your installments. Keeping this in mind, you can consider taking a loan for 25 to 30 years. However, remember that the lower the tenor of the loan, the better it is for me. Long term loans have to pay more amount as interest. In a 10-year loan, 57 percent of the amount you borrow has to be paid as interest. For a 20-year term, that figure jumps to 128 percent. For example, if you are taking a loan of Rs 50 lakh for 25 years, you will pay Rs 83.5 lakh as interest, or 167 percent more of the principal amount. Financial Trainer P.V. Subramaniam warns that borrowing is in fact negative compounding. The longer the tenor, the more money goes out of your pocket as interest. However, sometimes it becomes necessary to keep a long tenor. If a low-income person takes a 10-year tenor, he may not be able to get a loan as per his requirement, in which case he has to increase the tenor so that the EMI is affordable to his pocket.
- Schedule regular repayments
Being disciplined in paying dues pays off, whether it’s short-term like a credit card bill or long-term like a home loan, never missing a payment. A default or late payment of EMI can put a dent in your credit profile and you face problems in getting loans for other needs. So pay the loan EMIs on time, even if you have to miss an investment for it. You must decide which balance to pay first. Be extra careful with credit card payments. Because if you fail to pay it on time, non-payment penalty can be slapped and more interest will be added on the outstanding amount. If you don’t have enough money to pay off a credit card bill in full, pay at least 5 percent and rollover the balance, but don’t let it become a habit. Because interest has to be paid at the rate of 24-36 percent. To avoid missing the due date every month, instruct your bank in advance to pay at least 5 percent whenever the bill becomes due.
- Don’t take loans to spend or invest
The basic principle of investment is never to borrow money and invest it. This is like drinking ghee after going into debt. More sureties like fixed deposits and bonds
Target investment does not get as much return as you pay on the loan. Which gives higher returns than investments like stock market but has a lot of ups and downs. If the stock market goes down, not only will you incur a loss but you will be bound by the EMI burden. There was a time when real estate was considered a cost effective investment, housing loans were available at 7-8 percent and real estate prices were increasing at a rate of 15-20 percent per annum. At that time it was considered appropriate to buy property by taking a cheap loan. But now the situation has changed. Home loans now have to pay more than 10 per cent interest, against which property prices rise by a whopping 4-5 per cent. In some areas, property prices have only come down in the last 1-2 years.
This type of loan should also not be taken for discretionary expenditure, the credit card company may be sending you an SMS for a travel loan but it would be better to save for travel or other lifestyle expenses. Loanstreet.in founder Vinit Jain says that there is no point in taking a personal loan to buy a luxury watch or handbag. If you want to go on a holiday or throw a nice party or do some luxury shopping, you should start saving for it now.
- Take insurance for taking big loans
If you are taking a big home or car loan, you should also take insurance cover for it. Plan a term loan of the same amount as the loan amount so that if anything happens to you, the family is not burdened. If your dependents are unable to pay the loan EMIs, the lending institution can seize your property. However, if the loan is for 50 lakhs, then no more premium has to be paid for it. Common banks also put pressure on customers to take a term plan with reducing cover. It offers insurance equal to the outstanding amount. However, there are many better options to cover regular skin plan loans. Even after paying off the loan, the plan can continue. Another advantage of the regular term plan is that it can continue even if you shift the loan to another bank. Apart from this, the insurance policy that is linked to the loan is mostly single premium. It is not as cheap as regular payment plans. If the bank pressures you to take a loan-linked insurance plan, you can take the matter to the banking ombudsman and the insurance regulator.
- Keep searching for cheap loans
A home loan is taken for a very long time, so it is not wise to forget about it by signing the loan contract. Keep your eyes and ears open for new rules, and you should also keep an eye on changes in interest rates. RBI is going to change the base rate formula. It will also change your bank’s base rate. You should always look for cheap home loans, and switch to a bank if it is offering a loan at a lower rate than yours. However, keep in mind that it is wise to switch loans only when there is a significant difference in the interest rates of both. The reason is that you have to pay processing charges while switching loans. Switching loans are more beneficial at the initial stage. Suppose you have taken a loan at the rate of 11.75 percent and another bank offers you a rate of 9.9 percent. Switching can reduce EMI by 52 if there are 18 years left to repay this loan. But if the loan limit is only five years remaining, you can benefit from only three EMIs. The same applies to the prepayment of the loan. The faster you pay it, the better. RBI has not allowed penalty for prepayment of housing loan. But they can impose penalty on other loans.
- Understand the fine print
Reading the loan documents is a chore. It contains references to legal matters and is also quite lengthy. However, you should read the terms of the loan carefully. By doing this, you can save yourself from getting into a big trouble later. Subhash Shetty, who lives in Bengaluru, applied for a personal loan of Rs 1 lakh, but got only Rs 91,800. The bank deducted Rs 5,152 as upfront interest charge and also had to pay an annual insurance premium of Rs 3,047. Shetty had signed the loan agreement without reading any fine print. Some banks include terms in loan agreements that are against customers. If you do not understand anything written in the agreement, take the help of a financial advisor or a chartered accountant. You should sign the loan agreement only after understanding everything from him.
- Pay off expensive loans with cheap loans
If you have taken many loans together, you can roll them all into one cheap loan. For example, if you have taken a personal loan loan at an annual rate of 18-20 percent, it can be repaid by taking a cheap loan on a life insurance policy. It is wise to pay off expensive loans even with a loan against property. You should also consider gold loans and loans against bank deposits to pay off expensive loans. It is wise to pay off expensive loans as quickly as possible. If you get an annual performance bonus, tax refund money coming your way, or a large amount on the maturity of a life insurance policy, it can be used to make those payments. Often a tax benefit