April 14, 2016September 19, 2018 mohansamLoans
With banks falling over each other to attract business, taking a loan appears as easy as ABC. But don’t take a loan just because it is available. Make sure that your loan-to-income ratio is within acceptable limits.
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.
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.Use EMICalculator available in market to calculate accurate loan tenure.
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.
Never miss a loan EMI, even if it means missing other investments for the time. In an emergency, prioritise your dues. You must take care never to miss your credit card payments because you will not only be slapped with a non-payment penalty but also be charged a hefty interest on the unpaid amount.
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.
TAKE INSURANCE WITH BIG-TICKET LOANS
If you take a large home or car loan, it is best to take insurance cover as well. Buy a term plan of the same amount to ensure that your family is not saddled with unaffordable debt if something happens to you. The lender will take over the asset (house or car) if your dependents are unable to pay the EMI. A term insurance plan of Rs 50 lakh will not cost you too much.
Typically, banks push a reducing cover term plan that offers insurance equal to the outstanding amount. However, a regular term plan is a better way to cover this liability. It can continue even after the loan is repaid or if you switch to another lender.
Moreover, insurance policies that are linked to a loan are often single premium plans. These are not as cost effective as regular payment plans. If a lender forces you to buy an insurance plan that is linked to the loan, take up the matter with the banking ombudsmen and the insurance regulator.
KEEP SHOPPING FOR BETTER RATES
A long-term mortgage should never be a sign-and-forget exercise. Keep your eyes and ears open about the new rules and changes in interest rates. The RBI is planning to change the base rate formula, which could change the way your bank calibrates its lending rates. Keep shopping around for the best rate and switch to a cheaper loan if possible.
Loan documents don’t make for light reading. Paragraph after paragraph of legalese printed in a small font can be a put off. Yet, read the terms and conditions carefully to avoid unpleasant surprises. Follow these rules and avoid unpleasant experiences, while repaying loans.
