How To Take The Safe “Loan” Road?

By | May 22, 2012

Loans are not a nightmare as they seem to be. They can help you achieve your goals and also buy the assets that you have always wished for during periods of financial tightness. But there needs to be certain level of prudence that needs to be adopted while signing up for such debt. In situations where the interest rates, processing fees, pre-payment charges, loan tenor etc, are same for two banks, then it might be confusing for you to choose from. Then what would be your parameter based on which you need to choose your loan? Here are certain pointers you need to keep in mind while buying a loan in such situations.

Interest calculation:

We all know that interest rates are one of the most important factors. Now, how can you benefit from such a debt? Did you know about a term called “rest” which is used for a reducing balance on loan? Basically, what this term means is, when a borrower utilizes the option of rest, the principle amount of the loan is reduced as you go on paying your EMIs. Rest can be utilized quarterly, monthly and annually. This will help you tremendously as it will ease out your financial burden on your pocket.

Let us see how it works. If you borrow a loan of Rs5 lakh at 12% for 20 years, the total interest you pay on a monthly rest clause is Rs. 8.21 lakh. You pay Rs. 8.24 lakh on quarterly rest and Rs. 8.38 lakh on annual rest.

Loans should not be more than 30-35% of your income:

Make sure that the loans that you borrow do not exceed 30%-35% of your monthly income. It is understood that for an average middle class earner, there can be cases where a family can have the burden of a car loan, personal loans etc to finance their requirements. With the easy availability of loans at competitive interest rates and freebies differing from each bank to bank, one does not have an issue to borrow loans but the actual problem rests in the matter of its repayment.

Burdening your salary account with number of loans just invites financial trouble to your doorstep. Ensure that your borrowing does not exceed more than 30-35% of your monthly income. The main reason as to why this is cited as a huge concern is because, if your EMI on the home loan goes up due to a rise in the interest rate then your finances will have to bear the brunt.

Follow a ratio when opting for a car loan:

If you are planning to buy the vehicle of your dreams, try to follow the ratio of 20:4:10:

20 stands for down payment. You have to ensure that you manage to pay about 20% of your loan amount as down payment. That can tremendously ease the pressure on your finances.

4 stands for the tenor of your loan. Most banks and dealers try to offer their customers a loan tenor of even up to 10 years. That is not all that necessary. A loan tenor of up to 4 years is what is required. If you think your finances are enough, a lesser loan tenor can be adopted.

10 stands for the percentage of your monthly income that you should allot as your EMI. Make sure that your car loan EMI does not exceed more than 10% of your car loan.

Opt for a higher compounding interest:

For example, if you invest about Rs 50,000 in an asset which gives you returns at an interest of 12%p.a., utilizing the annual compounding method, you will earn Rs 56,000. If you opt for a semiannual compounding, your total savings will amount to Rs56, 180, however, if you opt for a quarterly compounding period you will get an amount of Rs 56,275.44, higher than when compounded annually. Thus shorter the compounding period, higher will be the value of your asset. This option can be utilized in cases where you wish to invest in a Fixed Deposit, the procedure for which varies from bank to bank.

All information including news articles and blogs published on this website are strictly for general information purpose only. BankBazaar does not provide any warranty about the authenticity and accuracy of such information. BankBazaar will not be held responsible for any loss and/or damage that arises or is incurred by use of such information. Rates and offers as may be applicable at the time of applying for a product may vary from that mentioned above. Please visit for the latest rates/offers.
Category: Articles directory specials

About BankBazaar

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.

Leave a Reply

Your email address will not be published. Required fields are marked *