Loans can be useful financial resources. On the other hand, if you make use of them without exercising caution, you may end up getting drowned in debt. Use loans for essential expenses and take measures to ensure you pay them back on time.
- The Basic Questions to Ask Before Going for Loans
When you apply for a Personal loan, stop to think. Impulsive decisions are always risky and they are especially dangerous when you make big decisions like taking a loan. First, ask yourself the following questions:
Do You Need the Loan?
Are you applying for the loan simply because you got an attractive offer from a lender? If you currently don’t have any urgent financial requirements, avoid making use of personal loan or credit card loan offers. These are high-interest loans and if you default on one or two EMIs, penalties and other charges accumulate.
Are You Taking the Loan For a Lifestyle Expense?
Do you intend to apply for a personal loan for an exotic vacation or to upgrade your gadget to the latest version? A better option would be to save up for them. You know anyway that the next version of your favorite smartphone would be coming out in a few months. You may have been dreaming of that European vacation for long. Why not save for them? Open an RD and save a part of your income for these expenses. With deposits, you earn an interest, even if it’s low, as compared to loans where you have to pay an interest.
Do You Have a Lot of Loans You are Struggling to Pay EMIs on?
Too many loans indicate that you are credit hungry and do not exercise enough financial discipline. Eventually, if you are unable to clear these loans, you will get to a debt mess that can be hard to get out of. Maxing out your credit cards and availing of all loan offers you get will affect your ability to meet even essential expenses. It will also adversely affect your credit rating, making it difficult to get a necessary loan like a home loan in the future.
Can You Afford the EMIs?
When you are shopping for a loan, look around and collect a lot of similar offers. Choose those with good loan terms like low interest rates and adequate repayment durations. If you get a huge loan sanctioned because of your current good credit rating but you eventually find yourself unable to keep up with the EMIs, this will negatively impact the good credit history you have established so far.
Once you have satisfactorily dealt with the above questions, focus on the following factors:
- Choose the Shortest Tenure for Which You Can Easily Afford EMI Payments
When repaying a loan, the loan tenure is a vital factor. Even if the interest is low, longer the tenure, the higher the amount of interest you will be paying on the loan. Examine loan offers, calculate your current monthly expenses including EMIs on other loans. Decide how much you can afford in monthly EMIs for this loan, you can also take help of a EMI calculator to find out your monthly EMIs. Choose the highest amount you can easily handle each month, to shorten the loan tenure and lower the interest payment on the loan.
- Make Sure You Keep Up with the EMIs
Schedule automatic payments from your account towards your loans. This way, you need not worry about forgetting your monthly repayments. Defaulting on EMIs could lead to penalties and other charges which would increase your EMI payments.
- Make Use of Allowed Prepayments
Most loans come with provisions that allow for penalty-free prepayments you can make each year to close the loan faster. Save funds and make use of these repayment options. Be sure to pre-pay higher amounts in the early part of the loan tenure.
The EMI you pay is split into two parts – one goes towards repaying the principal and the other towards the interest component. In the early stages of loan repayment, a higher percentage of the EMI goes towards the interest component, while in later stages, more goes towards the principal repayment.
So, if through prepayments you are planning to reduce the interest amount you pay, do it in the early stages.
- Take an Insurance Cover to Protect Your Family From Debts
Many banks and NBFCs will offer to combine a loan insurance product along with your loan. These offers may not always be the best choice for you. You can look at the choices in loan insurance products or you can just purchase a simple term plan life insurance. This will help ensure that the remaining EMIs will be paid and the loan repayments would not be a big burden on your family, even if you are not around to handle it.
Make good use of loans, don’t borrow beyond your capacity to repay. Don’t skip EMIs and take an insurance to protect your family from additional debts, in case something happens to you while you are still repaying a huge loan like a home loan.