If it would have been an ideal world, than everybody would have enough money for all their needs. Well the truth is that, most of us have to borrow to meet or to fulfill our bigger desires. The loans have become a carpet between aspirations and potential. Loans are being offered (read bombarded) through emails, SMSs and calls. Some bank offers low interest rates, some offer quick disbursals and some banks has a relatively easier process. So which one should a First time loaner should choose? Here are our 2 cents on this dilemma.
HOW MUCH CAN YOU AFFORD?
This question will act as a reality check for you. How much loan do you need? How much time you require to pay it back? Long term loans may have lower interest rate but eventually you will end up paying a lot of interest over the span of time. Loan is a debt. No one would like to live under debt. Manage and cross cut as much as you can to save your money and then only check out that how much loan is still required.
DON’T BORROW MORE THAN YOU CAN REPAY
Firstly don’t live beyond your means. There is a thumb rule for a few loans like the Car EMIs should not exceed 15% while personal loan EMIs should not exceed 10% of your in hand monthly income. If only loans and EMIs will consume 50% of your income than you need to understand that the loan would be of no use.
DO YOU REALLY NEED A LOAN?
Ask yourself. Ask your family. Do consult with your financial advisor or very close friends. Today banks are literally falling over each other to attract customers. Rethink twice if you really need a loan or not. Never ever take a loan just because it is available. If your loan takes up much of your income, your other funds like Education Fund for your child, your Retirement Fund would be the first one to be affected. Your savings would turn into negative.
KEEP THE LOAN PERIOD AS SHORT AS POSSIBLE:
As stated above, longer the tenure of the Loan, lower is the EMI. However, short term loans are the best. For example, for a 10 year Home loan, the interest paid at the end of the Loan period would be around 55% of the loan taken. On the other hand, for a loan of 20 year tenure, this interest at the end of the loan period will shoot up to 120% of the loan taken. This is Simple math which is clearly understandable.
BE TIMELY AND REGULAR:
Be disciplined in repayment of dues. Make sure you never miss the payment. Missing an EMI or delaying a payment of Loan can affect your credit score, which makes it difficult for you to borrow other loan in future in case of dire need.
UNDERSTAND THE DOCUMENTS ‘CAREFULLY’:
Do read the terms and conditions of loans before you receive unwanted surprises. Don’t take loan documents casually. Some Lenders deduct surcharges on the name of upfront interest charge or annual insurance premium which you might not be aware of.
Sometimes loan cannot be avoided. It is understandable. However before taking a loan, especially for the first time, be aware of the facts stated above. If possible, Do increase your EMIs and Loan repayments, with increase in your salary. This will help you in saving money and the loan would be paid off early.