So many things have changed with technology including the finance and banking sector. Today it’s not really a big deal to get a phone call, a mail or an SMS that offers a personal loan.
Different banks offer different features, like some promise to get a fast disbursal while others offer a personal loan at low interest rates. A lot of people do fall in such kind of a trap and go for the loan. But before you opt for such things there is information that everyone must know and be clear about.
Here are the top five rules that you must follow when taking a loan.
Go for Affordable EMI
A well-known saying goes that ever bite more than you can chew. This goes while opting for a loan as well. The EMI of the loan should not be so huge that it pushes you to the corner.
Usually, as a thumb of rule, your car EMI should not be more than 15 percent of your total monthly income and the personal EMI should not be more than 10 percent of the income. Now when it comes to the monthly outgo towards all of the loans it should not be more than fifty percent of the total income.
The loan to income ratio within this limit is acceptable. If it is not the case, you are going to face some important financial goals like saving for retirement or child’s education a backseat. Usually, it’s the retirement savings that are the first to go in such cases.
When you calculate the repayment capacity accuracy becomes important. Never take the future income into account. Always base all of the calculations on the present income.
If by any chance your industry goes into a tailspin as the times are bad, the ten percent of the increment that you may have based your assumptions on can, in reality, be just five percent or who knows even a zero.
Your credit profile can get a serious dent if your credit profile is missing an EMI or there has been a delay in the payment. This will eventually prevent you from taking loans in the future for other important things.
According to the experts, if by any chance t the borrower is unable to repay, he must contact the officials before the EMI check bounces. Another way to get an EMI that is affordable is simply extending the tenure.
Keep Tenure Short and Sweet
You must have already heard about how keeping the money invested for the long-term obtains the power of compounding. But this is just the opposite when it comes to loans.
There will be a greater burden on the borrower of the tenure is longer. Usually, borrowers are attracted towards the long-term loans as they have to pay a lower EMI and can also enjoy the tax breaks on the loans.
But it is a misunderstood strategy because, in the end, they have to pay a huge interest on the loan. Although tax benefits to bring down the effective cost of the loan, they still incurring expenditure.
Take Insurance for Big Loans
Loans are usually an easier method of acquiring assets. But in case that something happens to the borrower and the loan is not repaid, the lender is going to take over those assets.
Try to take insurance cover that is equal to the loan and this point goes especially for the big loan borrowers. A regular plan is the best method to insure yourself.
Make Sure Repayments are Timely
When it comes to loan repayments it will be advantageous to be disciplined. It doesn’t matter if it is a short-term debt like a credit card bill or maybe a long-term loan on the house, make sure you are never missing out on the payment.
When you are delaying or missing an EMI it is going to have a negative impact on your credit profile which can be harmful in the future as you won’t be able to take up more loan for other important needs at that time.
Even if it means other investments, never miss a loan EMI. Make sure your priorities your dues in case of emergencies.
Also, keep in mind that the loan against a property can also be used to repay all of the other outstanding loans. You can also consider going for options like gold loans or getting a loan against bank deposits as well.
Always Keep Looking for Better Interest Rate
When you are considering a loan that is going to be long term it must never be a sign and forget kind of a thing. Always be aware of the new rules and the changes that have been brought in the interest rates.
Recently the RBI has been thinking of changing the base rate formula that can have an effect on the way your bank calculates and imposes the lending rates. Make sure that you always consider and look for the best rate and try to switch to a cheaper loan if it is possible.
Although the difference must be at least of two percentage points or the prepayment fees on the old loan and the processing charges of the new loan are going to remove all the gains that you might be acquiring from the switch.
Always try not to skip on the paperwork, as the loan documents that are given o you are not for a light reading. Read all the important terms and conditions carefully so that you can avoid any unpleasant surprises in the future.
In the end, while going for a loan, make sure you discuss it well with your family and friends. This is also important as the repayments are going to have an effect on the whole house and not you alone.
It is important that your spouse is well aware of the loan and understands the reason behind it. So these were the top five rules and a few extra tips that you must follow when taking a loan.Older Articles New Articles