Taking a loan is an important decision even if it is a small amount. There are certain things you should always remember before even considering any loan.
Loans come in all sizes, if that is an appropriate term. Anyway, home loans are a BIG commitment while car loans are relatively lesser burden. Credit card payments are a regular affair while personal loans are loaded with high interest rates. Of course one of the favorite being gold loans that are very easy to get but also have their fair share of ‘Asterix’ to remember before pledging your gold. So loans are indeed in all forms and for all type of people and if the banks or financial institutes are not the way for you, then of course there are friends and relatives. All in all, if one needs a loan, there are plenty of ways to have it. I am not even talking about loan against property or business loans. So while loans solve a lot of your financial worries and of course we LOVE the TAX SAVINGS, in whatever form they are… loans provide that too. While all these loans are different kinds and have different angles to them, there are certain basic common things to keep in mind before taking any kind of loan in India.
1. Prepayment Terms:
First and foremost consider the prepayment terms. EMI amount that will set you back by every month is important but one must also check the terms and conditions, especially related to the prepayment since you would most likely be paying back the loan sooner than you actually may think.
2. Interest Rates:
The obvious one, not much to say, but should be considered since this determines how much extra amount the lender will take from your pocket. The lower the interest rates the better it is. I actually don’t need to explain more.
3. Actual ‘Affordability’:
This is not the same as EMI and interest rate affordability but the about your actual affordability. It is OK to afford 4-5,000 for a while and buy a Small Car or a Smart-phone (we live in a world where smartphones and cars have the same range of EMI albeit different durations.) Anyway so while you can buy that car by paying the Rs. 4-5,000 EMI but you also need to consider the cost that come along and that is the Upkeep of the car, maintenance, and fuel expenses and so on. Those are incidentals that will recur. Same goes for home loans, while you may afford the loan, you also need to bear in mind the society charges and maintenance towards the society. I have seen people merely going by the loan amounts and buying stuff and then realize the maintenance costs are something they cannot afford in the long term.
4. Your own earning potential:
It is very easy to over-estimate your earning potential and underestimate your future expenditure. It is actually very natural, we like to think good of ourselves and often assume higher pay and at the same time we often fool ourselves that we can ‘manage’ to cut our expenses enough to have affordable debts. However certain expenses are just unavoidable and they turn out to be substantial. Expenses like family dependence as you grow older, kids’ expenses – right from birth to their schooling and marriage, are often pretty high. So when taking on long term loans, make sure you realize that if you assume your income will rise, so will your expenses and hence if you are stretching now thinking that you will manage in the future, trust me, you will not. As a general practice, do not stretch while taking on EMI.
5. Duration of Commitment:
Do not opt for longer tenure just for the sake of lower EMIs. The longer you pay, the more you pay; it is as simple as that. The EMI may be smaller, but in that smaller EMI the major chunk will be interest pay and hence you will pay more in the long run which canbe even slightly more than double of what you borrowed. Always look to clear your debts as soon as you can.
6. Other liabilities:
While borrowing keep in mind any other loans that you may already have or may have to take in the near future. For instance while taking a car loan it can be that you would also be looking at buying a house in the near future. At that time if you apply for home loan, then your loan eligibility will be lowered by the amount of EMI that you are already paying for the car loan. This happens with any other type of loans as well.
7. Debt Trap of a ‘Serial Loan-Seeker’:
Don’t become a ‘serial borrower’. I have seen and even personally know people who just love to borrow. They are so into the idea of buying stuff by paying later that their life is just from paycheque to paycheque even with handsome incomes, since they have numerous loans to repay from small credit card dues to personal loans to car loans and home loans and even the EMI on consumer durables and smart-phones. They virtually do not own anything outright even if they can afford, since their mindset is such that why pay from our pockets at once if you can pay in parts. What they do not realize is that they are just eating up their savings and paying unnecessary interest even on things they can avoid. Heck, they even invest by taking loans which is virtual financial suicide. Anyway you get the point. Loans are not magical solutions to your financial problems, in fact if used unwisely they can only elevate your problems further.
Loans are good way to be able to buy something today that is essential and you can always keep paying later. However, taking loans at the drop of a hat and being addicted to the idea of not using your own money for anything is just, well… I just feel sorry for such people since their idea of finance and financial planning is just twisted, to say the least. Always consider the above points before opting for any type of loans in India.