Confused about taking a loan? Tips on Easy Debt Management
Technological intervention has transformed the lending industry. Through emails, SMS and phone calls, banks and NBFCs bombard potential customers with lucrative loan offers. Customers can also use online aggregators to choose the cheapest loans and banks can approve and disburse loans in a matter of minutes.
While technology has revolutionized how loans are disbursed, the principles of prudent lending have not. Borrowing money without need is always a bad idea. Nishant Arora, Sixth Element Finserve Setup Services India, said that the first rule of borrowing wisely is to stay within the means. “Borrow only if you are able to come back quickly”.
fixed vs floating
It is also important to carefully consider the differences between floating and fixed rates. The interest rate on floating loans fluctuates from time to time depending on the policies of the government. On the other hand, fixed rates provide a sense of confidence because the borrower knows that the interest rate will not vary.
According to Nishant, the EMI for all loans should not exceed 50 per cent of an individual’s monthly income. Accordingly, the EMI for an auto loan should not exceed 15 per cent of the monthly income, while it should always be less than 10 per cent for a personal loan.
credit period
Another important factor is tenure. All the major lenders offer home loans with a maximum tenure of 30 years. The cheaper the EMI, the longer the tenure of the loan, making a loan of 25-30 years very attractive. Still, it is better to take a loan for the shortest period possible. The interest expense for a long-term loan is exorbitant. The interest paid on a 10-year loan is 57 percent of the amount borrowed.
If the employee has been with the company for 20 years, the percentage increases to 128 percent. Sometimes you may have to work for long periods. If the term is ten years, a young person with a low income will not be able to borrow enough. The ideal option for such debtors is to increase the EMI amount every year commensurate with the increase in income. Raising the EMI in proportion to the increase in income, usually between 8 per cent and 10 per cent, will help pay off a 20-year loan in less than ten years.
Don’t miss EMI
Missing EMIs or postponing payments are two major issues that can hurt credit scores and make it more challenging to get loans for other purposes later in life. It is suggested that borrowers should not skip EMIs on the loan, even if it means sacrificing other properties.
Paying on time affects the CIBIL score, which is useful when applying for new loans as a better CIBIL score means a cheaper interest rate.
credit insurance
When a person takes a home or car loan, it is better to get insurance. Buying a term plan for the same amount will ensure that the borrower’s family is not left with unbearable debt in case of any untoward incident. If the family is unable to pay the EMI, the lender will take over the property.
Generally, banks promote low cover term plans which provide insurance up to the outstanding amount. A regular term plan, on the other hand, is a better strategy to cover this risk. It can continue even after the loan is repaid.
An unsecured personal loan, for example, can be replaced by a loan secured by life insurance plans. The loan given on the property can be used to pay off all other debts. Other possibilities to check are gold loans and loans secured by bank deposits. It’s also a smart idea to prepay high-interest loans as early as possible.
look for better rates
A long-term mortgage should never be treated as a one-time transaction. Stay alert for new rules and interest rate changes. Make sure the difference is good enough, at least 2 percentage points. Living with the prepayment penalty of the old loan and the processing fee of the new loan will not help. Switching is also beneficial if done wisely.
read the documents carefully
Loan documents are not at all easy to read. Unexpected surprises will be avoided by carefully reading and understanding the terms and conditions. If beyond legal comprehension, have a financial counselor or chartered accountant review before signing the agreement. It is always better to identify the pre-payment penalty and foreclosure charges before signing the loan documents.
Don’t change financial goals
Some financial goals evoke strong feelings, especially when they involve children. No parent would put the burden of debt on their children, especially for education, if they have the option. Using retirement funds to pay for a child’s education can be a dangerous move. Students today have options for financing their education, such as loans and scholarships, but there is no uniform system to help plan for an individual’s retirement needs. Loan
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