Availing a loan can assist you in attaining key goals—whether purchasing a home, financing studies, or clearing an emergency. Loans, however, also come with long-term monetary obligations and risk if not handled sensibly. Before putting pen to paper, it is important to know how much to borrow, which loan is best for you, and how repayment will affect your overall financial well-being. By applying some tried and tested thumb rules, you can make borrowing decisions that are reasonable, sustainable, and in line with your financial objectives.
1. Borrow only what you can easily repay
Your combined EMIs must not exceed 40% of your take-home salary. This leaves you with sufficient funds for daily expenses, saving, and contingencies. Exceeding this compresses your budget and leads to greater default risks.
2. Equalise loan tenure with the asset life
For short-term vacation or gadget needs, do not take long loan terms. In the same manner, housing loans may be long term (15–30 years), but personal or automobile loans should be repaid in less than 5 years. A mismatch complicates the interest load and strains your finances unnecessarily.
3. Have a good credit rating
A credit report over 750 not only enhances the loan approval probability but also puts you in the bargaining position when negotiating the interest rate down. Check your credit report periodically and never delay paying credit card bills and loans to ensure that you have a good score.
4. Shop around for loan offers before lending
Don't take the first lender. Compare prepayment charges, processing fees, and interest rates with banks and NBFCs. A 0.5% variation can keep you thousands of rupees richer in the tenor of your loan.
5. Don't borrow against depreciable assets
While car loans are common, borrowing for luxury items or short-lived gadgets is best avoided. These items lose value quickly, but you’ll still be paying EMIs long after their utility drops. Save for such purchases instead of borrowing.
6. Prepay high-interest loans early
If you have excess funds or a bonus, pay off high-interest loans such as credit card amounts or personal loans. This saves you the total interest outgo and increases financial liquidity. Ensure only that there is no prepayment charge.
7. Refrain from ignoring insurance
For big loans such as house loans, take term life insurance that settles the loan balance after you pass away. If you pass away prematurely, this ensures that the family does not sink into debt.
8. Read the fine print
Do not sign on a loan without going through all terms verbatim—interest calculation, foreclosure conditions, sneaky fees, and penalty system. Getting these misconstrued can cost you dearly in the future.
Borrowing a loan is an excellent money weapon if used judiciously. These thumb rules will allow you to lend money confidently, steer clear of debt traps, and keep your long-term finances safe.
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