Current developments in the Indian economy have spelled out easy loans for the consumer. Today, loans do not require the lengthy paperwork characteristic of the past. Banks like HDFC disburse loans in minutes to its net banking customers. But this ease in obtaining a loan does not change the basics of borrowing.
Technology has simplified the procedure but the needs to borrow money still remain the same. Borrow loans as a necessity and not as a luxury. Exhaust all your options before turning to a money lender for assistance. In a practical world not all our needs are met by our funds. One does need assistance in fulfilling certain goals. It is this need that the banks and NBFCs depend on. While taking a loan, consider the following guidelines for a hassle free transaction.
Maintain a loan to income ratio:
It is necessary to keep the deductions in your monthly income in check. The income is your sole vehicle to ride your retirement on. All your savings, your investments that secure your life after retirement come from your income. Don’t burn a huge hole in your income today at the behest of securing your retirement. Contrarily, don’t invest too much in your retirement at the behest of your today. Loans for necessities are advisable but loans for luxuries should be avoided. Maintain an EMI to income ratio, and keep your EMI’s less than 50% of your income. Try to maintain a balance. Try planning such that you don’t deny your today nor do you deny your tomorrow. By a thumb rule, car loan shall not exceed 15% of your income and personal 10%.
Keep the loan for as short time as possible:
Loans work on a compound interest. The longer the loan the greater is the interest paid by the borrower. A loan of 50 lacs spread over 25 years would end up costing the borrower 167% of the total amount. That means the borrower will return 83.5 lacs in EMIs on a loan of 50 lacs in 25 years. Young borrowers have no other option than taking a long tenure to be able to afford the amount. As the tenure increases the EMIs decrease making the loan feasible. Such young borrowers can pay of the loan early by diverting bonuses or yearly appraisals to the amount being paid. A debt is a debt; the longer it stays on you, the heavier it will be. By paying the debt off early one can then concentrate on investing for his retirement.
Be disciplined in your transactions:
This should be the groundwork not only in your financials but in your life as well. It pays to be disciplined. Whether it be the EMI of the loan or the need that made you borrow the loan. Discipline will help you. Missing out on an EMI not only adds to the interest, it hurts your credibility as well. Don’t take a loan to splurge or invest in the market. Travel plans, luxury shopping or lavish parties are best done with your savings. And the market is too big a risk to be taken on borrowed money. Safe investment options like fixed deposits will never match the interest rate the bank compounds. These are not a wise place to put the loan money in.
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