No matter how much money you have, there are times when you need a loan. It's in such times that you need to know the 5 golden rules of availing a loan.
The first thing you need to understand is the difference between a good loan and a bad loan. A home loan which helps you build an asset like a home, is a good loan. You get a roof over your head and the value of the property appreciates with time. An education loan is also a good loan as it helps you get quality education and a successful career.
Availing a personal loan for a holiday is a bad idea. This loan is unsecured and charges high interest. A personal loan must be availed only in an emergency. Availing a personal loan to splurge and spend on wants, could make it a bad loan.
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Avail a loan if you really need it and have a proper reason for doing so. Many banks, non-banking financial companies and loan aggregators, provide a lot of offers to attract new customers. But, you should not fall for such offers. Don’t borrow only to claim tax benefits or because of attractive interest rates.
Never borrow more than you can repay. Your equated monthly installment (EMIs), should be easily manageable. Make sure your car loan EMIs do not exceed 15% of your net monthly income.
Your personal loan EMIs should not exceed 10% of your net monthly income and home loan EMIs should not exceed 35-40% of net monthly income.
Usually, borrowers opt for loans of a long tenure, because of lower EMIs and also tax benefits. You should always remember that if you go for a loan of long tenure, you end up paying high interest.
Let's say you have availed a home loan of Rs 30 Lakhs at 9.5% rate of interest for 15 years. Your interest outgo will be 88% of the Principal. If you increase the loan tenure to 20 years, your interest outgo will be 124% of the Principal.
When you avail loans of big size like a home loan, make sure to avail term life insurance on it. If something happens to you, the insurer will pay the sum assured to your nominee and they can pay back the home loan with this money.
You should always read the fine print carefully before signing the loan agreement. Usually, the transparent part of the deal will be printed in bold letters and some suspicious clauses will be hidden in the fine print. So, it is advisable to read and understand the agreement carefully before signing. Be Wise, Get Rich.
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