10 Things You Must Consider When Taking a Loan

By | March 13, 2017

10 Things You Must Consider When Taking a Loan

There comes a stage in everyone’s life when they need financial assistance to meet a challenging situation. The challenge could be a health-related issue, a marriage in the family, the need to buy an asset or simply trying to fulfill some family requirement.

This is exactly why we have lending institutions that give us access to loans as per our repaying capacity.

If you’re considering taking out a loan, here are a few things to keep in mind:

1: Borrow only what you can repay

From Car Loans to Home Loans and everything in between, borrowing has become easier than ever, therefore tempting you to increase your purchasing power with a little help from your bank.

However, you must have a repayment plan in place before you borrow, and what you borrow should not be a burden. Ideally, your loan EMI should not exceed 40-50% of your net monthly income.

2: Add up your borrowing costs

When you look at the price you have to pay for taking a loan, make sure you understand all the associated costs and not just the EMIs.  Additional charges include loan processing fees, pre-payment fees, and foreclosure charges.

3: Longer tenure translates into higher interest payment

The longer your loan tenure, the higher the overall interest component.

For example, a Home Loan worth Rs. 50 lakh at 10.5% for a 20-year tenure would result in a monthly EMI of Rs. 49,919, leading to an overall interest component of Rs. 6,98,055. If you increase the tenure to 30 years, the EMI marginally reduces to Rs. 45,737, but increases the interest component significantly to Rs. 11,465,307.

4: Ensure timely repayment

No matter how big or small your loan is, ensure timely repayment. Missing your loan EMI repeatedly could dent your Credit Score, thus reducing your borrowing potential.

5: Don’t borrow to invest in risky assets

Seeking a loan in order to make an investment in risky assets such as the stock market is only for those who truly, deeply understand how the stock market works. For the rest of us, loans should be taken for simpler reasons: like buying a home, car or to pursue a college degree.

6: Seek loan protection insurance

If you do not have adequate Life and Health Insurance, and if you don’t have an emergency fund to cover situations such as prolonged loss of employment, then your ability to pay your EMIs would be jeopardised.

This situation can be helped with a loan protection cover, which will repay your loan in case of your untimely demise, and even offer you temporary respite during a loss of income.

7: Compare loans proactively

Before you zero in on a loan, you must compare the various loans available in the market in terms of interest rates, charges, repayment terms, etc.

Understand how banks calibrate the lending rate and the prepayment clauses so as to pick the best option to meet your needs. Go online and compare products with loan aggregators before finalising a product.

8: Read the fine print

The terms and conditions associated with loans are unique to each lending institution and you must read them carefully to understand all details.

9: Discuss the loan with your family

You must talk with your family before taking out a loan since they will share your financial liabilities in your absence whether they like it or not. Loan repayments impact a household’s budget, so the family must help share your responsibilities in any way they can.

10: Understand the difference between good loans and bad ones

If you do desire a loan, you should ideally acquire it in order to purchase an asset that creates long-term value. So, make sure you’re borrowing for the right reasons.

However, being debt-free isn’t always great either. If you never take a loan, or don’t plan on getting yourself a Credit Card, you won’t have a credit history. Remember, in order to assess your creditworthiness, lenders check your credit history before sanctioning a loan.

Repaying a loan can become a long-term commitment, and you need financial discipline in order to stick to this commitment. Make sure your finances are in order and your repaying capacity is robust before you take a loan.

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Category: Money Management Msn Yahoo

About Dheeraj Kapoor

BankBazaar is the world's first neutral online marketplace for instant customised rate quotes on Loans, Credit Cards, Insurance and Investment products. Shop for financial products just like you buy everything else now - online.

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