Technology has changed several things for the lending industry. Online aggregators help customers zero in on the cheapest loan and banks take less than a minute to approve and disburse loans. However, the canons of prudent borrowing remains unchanged. It still does not make sense to borrow if you do not need the money - or to take a long-term loan only to enjoy tax benefits available on the interest you pay.
The golden rule for smart borrowing is what the older generation has been telling us all the time: do not live beyond your means. We list that 5 immutable rules of borrowing that potential borrowers must keep in mind.
1. Do not borrow more than you can repay
Take a loan that you can repay. One thumb rule says that car EMIs should not exceed 15% while personal loan EMIs should not account for more than 10% of the net monthly income. Your monthly outgo towards all your loans put together should not be more than 50% of your monthly income.
2. Keep the tenure as short as possible
The maximum home loan tenure offered by all major lenders is 30 years. The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 25-30 year loan. However, it is best to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high. In a 10-year loan, the interest paid is 57% of the borrowed amount. This shoots up to 128% if the tenure is 20 years.
3. Ensure timely and regular repayments
It pays to be disciplined, especially when it comes to repayment of dues. Whether it is a short-term debt like a credit card bill or a long-term loan for your house, make sure you don’t miss the payment. Missing an EMI or delaying a payment are among the key factors that can impact your credit profile and hinder your chances of taking a loan for other needs later in life.
4. Understand the fine print
Loan documents are not made for light reading. Paragraph after paragraph of legal terms printed in small font can be a put off. Yet, read the terms and conditions carefully to avoid unpleasant surprises. The key is to not get intimated by those fine prints, but ensure that all the terms and conditions, along with their implications are well understood.
5. Keep spouse, family in loop about the loan
Before you take a loan, discuss it with your family. This is important because the repayment will impact the overall finances of the entire household. Make sure your spouse is aware of the loan and the reasons for taking it. Don’t miss out on that opportunity by keeping your need under wraps.