Few pointers to consider before taking a loan

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Few pointers to consider before taking a loan
As of today, nobody minds nibbling a small portion of future income source to finance current needs and wants. However, financial responsibility should be given more weight over financial dreams.

And sometimes lured by the different finance options available to us we tend to go wrong and this has severe repercussion on our present as well as future finances. Thus, choice of loans should involve a diligent and prudent exercise with focus on some of the thumb rules.

1. Borrow funds to create assets that appreciate in value : As far as possible, borrow only for building assets that appreciate in value over time. Home loan for the purpose of investing in property is the best choice among all other financing options. With tax advantage as well as lower rate of interest, you can see the value of your asset appreciating each day while still paying interest as per the current rates.

Investment in a property by opting for the home loan in due course of time pays off well by saving on the rental expenses. Also, the immovable asset enables one to meet financial needs during retirement through reverse mortgage option. Know about reverse mortgage.

2.  Opt for finance for purposes that increase your value or productivity : Banks and financial institutions in order to increase their asset base or boost economic growth whichever way it be interpreted are providing credit for every other purpose. But, it is the duty of the borrower of the funds to not get hooked by such deals and instead finance only those needs that increase your productivity or earning potential.

 Borrowing for financing your education is an investment that reaps well in future course. However, despite the pluses of better future prospects and tax advantage to borrower of the loan, experts suggest that education loan should be opted only for pursuing courses in premium institutes else it could lead to financial distress.

3. For emergency take loan on fixed deposit, LIC or gold : As loan against your different savings comes at a lower cost opt for these instead of personal loans or credit card.

4. Shun bad loans : Loans for financing purchase of assets that depreciate in value should also be eschewed as such loans provide no value for money and instead drain substantial funds from borrowers pocket inadvertently. Other bad loans such as credit card, personal loan that are in fact the costliest finance options should also be avoided unless there is real need. As with hefty repayment, returns from your saving and other investments cannot match the cost for such loans.

And in case you cannot avoid them, discharge the liability towards such loans at first. Ideally, pay-off credit card dues within the credit cycle available to you.

5. Keep your EMIs below 50% of your take-home salary : EMIs for different loans should under no circumstance exceed 50% of your take-home and instead you should try and maintain it much below. So that any extra financial burden or emergency could be easily catered to.

6.  Prepay loans : Car loans and personal loans should be opted from institutions that do not charge for prepayment. Also, while financing for car purchase, make maximum possible down-payment to reduce your liability.

7. Regularize EMI repayment: Focus on repayment, as any default on your part, reduces your credit worthiness.


Story first published: Friday, September 27, 2013, 13:25 [IST]
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