With an expansion in the reach of the banking and financial sector in the country, borrowing has become a fairly mainstream action for the populace. More and more people are opting for products like car loans, personal loans or home loans to meet their lifestyle requirements as well as immediate liquidity needs. Borrowing money however comes at a cost namely interest. While borrowing has become easier with technological innovations, the principles of prudent borrowing are still the same. Here are some factors to consider while borrowing from banks or NBFCs.
Borrow as Much as you Can Repay
As a thumb rule, personal loan EMI should account for less than 10% of your monthly
income while a car loan EMI should be limited to 15% of monthly income. This is to ensure that you are not overburdened too much with installments to meet general expenses.
Opt for Short Tenures :
Long term loans come with low EMI but higher overall interests. The higher the tenure, the more you end up paying to complete the repayment. It is advisable to opt for higher EMIs or go for increasing EMIs such as 10% more every year. You can calculate emi’s by using loan emi calculator .
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Don’t Skip on Installments :
Skipping EMI payments will adversely affect your credit profile. A bad credit profile will make it difficult to get loans in the future and you will most likely be quoted higher interest rates on borrowed money.
Go for Loan Insurance :
If you are borrowing larger amounts, it is advisable to take insurance cover on the loan amount. In case something unfortunate were to happen, you can rest assured that your family isn’t overwhelmed by the large EMIs in your absence.
Compare Products :
Before taking a loan you should always compare rates from different lenders. However, the comparison part doesn’t get over here – even while repaying a loan you should keep looking for better options and transfer to that loan. The thumb rule here is that the new loan should have an interest difference of at least 2% else the processing charges and pre-payment penalty will cut into the benefits.
Consolidate Debt :
If you have a multiple running loans, it is prudent to consolidate all the loans under an umbrella low-cost loan. The high-interest borrowings should be ideally paid off at the earliest in case consolidation is not an option.
Keep an Eye Out for Retirement Funds :
You might be tempted to dip into your retirement funds to meet obligations such as child’s education or marriage. Loans are available for all these scenarios though nothing of the sort is available once you retire. Taking a chunk out of retirement funds is a bad decision that will affect you adversely later on.
Avoid Borrowing for Investments :
Borrowed amount should not be used for investments, whether in safe instruments like fixed deposits or in volatile equities. The returns from investments in savings instruments hovers under 10% while a personal loan could cost you anywhere between 14% and 34%. The calculations don’t look promising for equities also as they are volatile instruments and if unlucky you might end up losing money.
