Like most financial offerings, a loan must be taken after due diligence. Read on to know about some easy steps that you can take to ensure that your loan remains a financial asset and does not reach a point where it starts to pinch you financially.
Loans can be a double-edged sword. On one hand, they allow borrowers to explore the possibility of ‘buy now pay later’ option, while on the other they have the potential to hurt the short and long-term financial health of the borrower due to their interest rates component. Like most financial offerings, a loan must be taken after due diligence. You should have a plan in place to ensure timely repayments to avoid any debt trap or financial stress.
Here are some easy steps that you as a borrower can take to ensure that a loan remains a financial asset and does not reach a point where it starts to pinch you financially.
Choose Fixed Vs Floating Interest Rate Smartly
To ensure you have a smooth loan tenure, you must choose wisely between the fixed or the floating interest rate after a proper assessment of each. If you believe in a fixed outgo each month, then a fixed rate loan works well for you as rates remain unchanged for the full tenure. This helps you plan ahead more smartly compared to a flexible interest rate, which fluctuates as it is linked to Marginal Cost of Lending Rate(MCLR).
Know About Pre-payment Charges
Depending on your loan type and amount, sometimes prepayment of the loan works out better than paying EMIs for the entire loan duration. But not all loans offer free pre-payment option. It is important to have a fair understanding of all the charges associated with pre-payment so that you do not incur high costs if you opt for it. You should check all the aspect of a loan, including the lock-in period.
Opt For Loan Insurance
A loan is a long-term financial commitment. In case of untimely demise of a borrower or physical disability, the loan repayment responsibility is passed on to the immediate family or dependents. A loan insurance protect the dependents of the borrower in their absence or a crisis. Loan insurance is a must-have for all long-term loans, including Home Loans.
Ensure EMI Is Below 50% Of Monthly Earnings
A good yardstick to ensure your loans remain pocket friendly at all times is to ensure your entire loan EMIs put together must not exceed 40 to 50% of your monthly income. If your loans EMIs exceed the amount, you are under undue financial risk, so prepayment and foreclosing of certain loans should be exercised to bring the ratio below the 50% mark. Therefore, it is wise to add up your personal loan EMI, automobile loan EMI, home loan EMI etc. and ensure the total loan EMI outgo per month still leaves you with enough funds at hand for other financial needs of the family, including savings and investments.
Explore balance transfer option
A non-budget friendly loan does not mean that you have to remain committed for the entire duration of the loan. If you can find a cheaper loan for a long-term loan like home loan, negotiating with your current lender or opting for a balance transfer option can result in ample savings. The sooner you move your loan to a newer lender offering lower interest rates, the better it is. Therefore, if you find yourself in a dropping interest rate scenario, talk out with your bank to renegotiate the interest rate or explore balance transfer option proactively.
A loan can be a financial asset if you do your homework well and understand all associated terms and conditions.