Follow These Rules While Taking a Loan

Do you have a job that you think spays you well but, you realise that it is not enough as there a lot of things that you can’t afford to buy? Well, it is a story of all our lives. This is where the banks and financial institutions benefit from and offer us loans to help us meet our ends. But, do these banks really help us or just helping themselves?

If you have taken a home loan, car loan or a personal loan, the EMI of all these loans can’t be more than 50% of your income. The loan to income ratio is the total EMI divided by the net monthly income multiplied by 100. The comfortable loan to income ratio is 20-25% anything above it is to be dealt with caution. Follow these rules and help yourself from being enslaved by debt.

Borrow money that you can repay:

Don’t live beyond your means. Take a loan that can be easily repaid. Keep in mind that your car loan EMI should not exceed 15% of your net monthly income. Your personal loan EMI should not exceed 10% of your net monthly income. If your EMI is higher, you will not be able to save a dime for his retirement or to educate your child. Don’t accumulate a negative net worth.

Take loans for a short term:

Most financial institutions offer a maximum tenure of 30 years to pay the home loan. It may seem tempting to opt for it as you will be paying lower EMI. But, you don’t realise that the interest outgo is too high. If in 10 years you would be paying 57% interest on the borrowed amount, in 20 years it will shoot up to 128%. It is best that you take a short term loan that you can afford. But at times you have to take the longer term as you may not have enough income to pay off the loan in a short period of time. The best option here is to increase the EMI amount each year as your income increases.

Make the payments on time:

If it is your EMIs or a credit card bill, don’t miss the payment dates. Missing a payment will affect your credit score and hamper your chances of getting credit in the future. Prioritize your dues and never miss your credit card payment days as then you will be paying a hefty interest on the unpaid amount. If you don’t have enough money to pay the entire credit card bill, then pay the minimum and pay off the bill at the earliest. 

Don’t borrow to spend or invest:

Never use borrowed money for investment. The safe investments will not match the rate of interest you will be paying for your loan. The investments that offer higher returns are too volatile. Don’t take for discretionary spending like for travel etc. Don’t take a personal loan to buy an expensive watch or high-end bags. If you wish to go on a travel or buy an expensive shoe or a bag or a watch, start saving for it. 

Take insurance for big loans:

If you have taken a huge loan, then you might as well consider taking a term plan for the same amount to ensure that your family will not have to be burdened with the loan in the event you die due to unavoidable circumstances. Banks will offer a reducing cover plan but a regular term plan is better way to cover the liability.

Shop for better rates:

Keep your eyes open for changes in the interest rates and take into consideration the prepayment charges and penalty charges if any. Also look out for the switching charges. Compare the rates with various banks and then take a call on which financial institution that you must choose.

Read the fine print and understand it:

Loan documents are lengthy, but they are supposed to be read. Read the term and conditions so that you are not in for a surprise. Look for clauses and if there is anything that you do not understand, get it clarified.

Consolidate loans:

If you have too many loans running, consolidate as much as you can and replace them with cheaper loans, unsecured personal loan with charges up to 20% can be replaced with loan against life insurance policy. Loan against Property can be used to repay other outstanding loans. Prepay costly loans at the earliest, don’t keep them running to avoid tax. You are still incurring an expense even if it is saving you tax.

Don’t compromise on your retirement to avoid taking a loan:

You will not want to burden your child with education loan and hence compromise on building your retirement funds. Don’t risk your retirement just so you can educate your child. Make use of the various scholarships and loans.