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MONEY TRAP - 4 : Borrowing More Than The Requirement

    Mr. C.S. Sudheer | Tuesday, June 21,2016, 06:54 PM
 

There is a famous sayingIt is better to go to bed supperless, than rise in debt”. Not convinced with this saying? How about “Interest on debts grow without rain”. Borrowing more than you require, is like knocking on the doors of poverty. But there’s a small problem ….You just cannot control that urge to borrow. There are so many things to buy…Smartphone…Laptop…The Latest Car… Your neighbor just returned from a tour to Greece. He plans to go to the US, next summer. You simply must go abroad on a holiday. But a tour abroad costs a lot of money. How will you get this money? Oh…You can always borrow. What are banks for anyway? You can pay back the money tomorrow. Your motto…Who has seen tomorrow? Just live for today.

Do you need that personal loan?

One of the most marketed loans around, is the personal loan. You don’t need to give any reason when you avail a personal loan. Very convenient right….Just the loan you need to go on a foreign tour. You are not the only person who likes personal loans. Rajesh works as a web designer in an IT Firm and draws a salary of INR 3 Lakhs a year. His monthly take home salary is around INR 22,000. Rajesh loves to travel, but expenses ensure he never has money to spare. Rajesh’s dream….to go on a holiday abroad. A reputed travel agency, offers European tour packages, to cities in Switzerland and France. The cost of the tour is around INR 1.5 Lakhs for 6N/7D. Rajesh badly wants to go on this tour. But there’s a problem… Rajesh doesn’t have the money. This is when he sees an advertisement from his bank. Avail a personal loan at an interest of 16% a year and pay it back in easy EMI’s. Rajesh jumps at the offer. He avails the personal loan for a tenure of 2 years. He then takes up the European tour package and has a great time in Paris and Geneva.

Problems began when Rajesh returned to India. He had to pay an EMI of around INR 7000 to his bank, for the personal loan. Rajesh could not manage his expenses, even when he had no personal loan to repay. Now he has the twin headache of both personal loan and expenses. Soon Rajesh fell behind on his EMI payments on the personal loan. His CIBIL score dropped as he struggled with repayments. Struggling to repay the personal loan, Rajesh had fallen in the loan trap.

Was a holiday abroad so important that Rajesh had to sacrifice his peace of mind and all his financial goals? Could he not have waited till he got a salary hike and then went abroad? A personal loan though easily available, must be availed with a great deal of caution. This loan charges a high interest rate and if you borrow more than your requirement, you could struggle with the repayment. When you avail a personal loan, make sure that your EMI payments are within 10% of your net monthly income. What do you learn from Rajesh’s mistake? Never borrow more than you require, to splurge on things, you don’t really need.

Should You Avail a Loan Amount More Than You Require?

Your brother-in-law has just bought a luxurious 2 BHK apartment, in an upscale area in the city. He calls you over for dinner and shows off his apartment. You come home highly upset and make a decision….You will also buy a luxurious 2 BHK apartment, in a posh area of the city. But there’s a problem. Your brother-in-law has a high paying job and could easily buy his apartment. You on the other hand, have to avail a home loan to buy your apartment. You would have to avail a very high amount, which you would struggle to repay. Is this a good idea? Would it not be better to simply buy a 1 BHK apartment in this area and not struggle paying back the home loan EMI’s? You stay with your spouse and child. Why do you require a 2 BHK apartment?

Banks in India, sanction only 80% to 90% of the cost of your property/apartment, when you avail a home loan. You have to arrange the rest of the money yourself. You have to pay the builder about 20% of the cost of the apartment, from your own pocket. This is called the down payment. If you purchase a 2BHK apartment which costs a crore, the down payment would be about INR 20 Lakhs. You would be forced to avail a personal loan, at a very high rate of interest, to arrange this money. You might also have to compromise on your financial goals. If you purchase a 1BHK apartment in the same area, it would cost you only INR 60 Lakhs. The down payment would be a much lesser INR 12 Lakhs. This is an amount you can easily arrange.

Your lifestyle could take a hit

You love eating out in good restaurants and attending parties. You have admitted your child in a very good International School. Fees for this school are very high. Your wife is a heavy spender and buys the latest electronic gadgets. You also love travelling abroad and do so often. If you purchase this 2 BHK apartment, you would struggle to pay the home loan EMI’s. You would have to compromise on your quality of life. With job security being a major problem these days, is it wise to be paying very high home loan EMI’s? It is definitely better to compromise and purchase a 1 BHK apartment, so that you can easily pay the home loan EMI’s.

For any loan requirement one should always know and consider all the alternatives. The team of wealth doctors at IndianMoney.com is always there to help and guide you. You can explore this unique Free Advisory Service just by giving a missed call on 022 6181 6111. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice / education to ensure that you are not mis-guided while buying any kind of financial products.

Mr. C.S. Sudheer

Mr C.S.Sudheer is a management graduate. He started his career with ICICI Prudential Life Insurance and later on worked with Howden India. After his brief stint in Howden India, he moved on and incorporated Suvision Holdings Pvt Ltd which is the sole promoter of IndianMoney.com. He aims to build a nation that is financially literate with investment savvy citizens.

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