Ten golden rules to follow when taking a loan
In an ideal world, everybody would have enough money for all his needs. In reality, many of us have little option but to borrow to meet our goals, both real and imagined. For banks and NBFCs, the yawning gap between reality and aspirations is a tremendous opportunity. They are carpet bombing potential customers with loan offers through emails, SMSs and phone calls. Some promise low rates, others offer quick disbursals and easy processes.
Technology has changed several things for the ..
Technology has changed several things for the ..
While technology has altered the way loans are being disbursed, the canons of prudent borrowing remain unchanged. It still doesn't make sense to borrow if you don't need the money. Or take a long-term loan only to enjoy the tax benefits available on the interest you pay. Our cover story this week lists out 10 such immutable rules of borrowing that potential customers must keep in mind. Follow them and you will never find yourself enslaved by debt.
1. DON'T BORROW MORE THAN YOU CAN REPAY
The first rule of smart borrowing is what the older generation has been telling us all the time: don't live beyond your means. Take a loan that you can easily repay. One thumb rule says that car EMIs should not exceed 15% while personal loan EMIs should not account for more than 10% of the net monthly income. "Your monthly outgo towards all your loans put together should not be more than 50% of your monthly income," says Rishi Me ..
It started with two personal loans of Rs 5 lakh six years ago. At that time, he was paying an EMI of Rs 18,000 (or 40% of his take home). Despite stretched finances, Kumar took a car loan of Rs 5.74 lakh in 2012, adding another Rs 12,500 to his monthly outgo. Last year, he took a third personal loan of Rs 8 lakh to retire the other loans and another top-up loan of Rs 4 lakh to meet other expenses. Today, he pays an EMI of Rs 49,900, which is almost 72% of his net take-home pay.
2. KEEP TENURE AS SHORT AS POSSIBLE
The maximum home loan tenure offered by all major lenders is 30 years. The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 25-30 year loan. However, it is best to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high. In a 10-year loan, the interest paid is 57% of the borrowed amount. This shoots up to 128% if the tenure is 20 years.
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3. ENSURE TIMELY AND REGULAR REPAYMENT
It pays to be disciplined, especially when it comes to repayment of dues. Whether it is a short-term debt like a credit card bill or a long-term loan for your house, make sure you don't miss the payment. Missing an EMI or delaying a payment are among the key factors that can impact your credit profile and hinder your chances of taking a loan for other needs later in life.
4. DON'T BORROW TO SPLURGE OR INVEST
This is also one of the basic rules of investing. Never use borrowed money to invest. Ultra-safe investments like fixed deposits and bonds won't be able to match the rate of interest you pay on the loan. And investments that offer higher returns, such as equities, are too volatile. If the markets decline, you will not only suffer losses but will be strapped with an EMI as well.
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