Planning To Borrow Money? Here are 5 Things to Keep in Mind

Consumer debts help us fulfil our dreams and aspirations, be it a dream house, car or overseas education. At attractive interest rates, easy documentation and processing, and faster loan disbursal have made taking a financial loan even more convenient.Besides, with the technological advancements, consumers can now compare the interest rates, and additional benefits offered by financial institutions and select the suitable one as per their goal and financial capabilities. As easier it seems to borrow money, coming out of debt is, even more, tougher and may put you in a vicious circle of borrowing and paying off the loan.If you are planning to borrow money, here are some tips you should follow:

Owing to the competitive scenario, banks and other financial institutions are eager to offer loans at attractive interest rates. But the easy availability of loan shouldn’t be your reason to borrow money. It is advisable to evaluate priorities and always have a cut-off limit for your expenses.If you borrow money, your loan should not eat away more than 50 % of your income. If you borrow more than you can repay, you may encounter an additional financial burden if faced with a medical crisis or an unforeseen event.

Avoid taking loans for discretionary needs such as electronic gadgets or international vacation. Such big-ticket purchases will never cease, and you will plunge deeper into the debt hole. Besides, it’s not advisable to purchase investments through loans. The low-yielding investments will fail to cover the loan interest. For high-yielding investments, market vagaries may lead to losses and, in turn, making it difficult to pay the EMI.

Banks offer a maximum loan tenure of 30 years which is usually applicable to home loans. You will benefit lower EMIs with longer tenures. However, the interest rate is higher which is the main reason for banks convincing loan applicants to opt for longer tenures.For instance, you opt for a home loan of Rs. 25 lakhs at 7.85% interest rate and tenure of 10 years, your interest amount would be around 11 lakhs. But, keeping the loan amount and interest rate the same, if the loan tenure is 25 years, you will be paying around Rs. 32 lakhs only as interest. So it’s prudent to keep the loan tenure short.

Stay on the lookout for new rules and change in interest rates introduced by Reserve Bank of India (RBI) that could influence your existing loan. Check for financial institutions offering lower interest rates and ease yourself by transferring your current loan to an affordable lender. Also, to benefit the lower interest rate, the balance transfer should be done early.For instance, your existing loan is charging 10 % interest rate and the new lender is offering the same at 7.85%. The savings on EMI will be higher if the loan has 15 more years to complete. If you decide a balance transfer in the last five years of the tenure, you will hardly benefit from the switch.Don’t forget the foreclosure charges of the old loan and the processing fee imposed by the new lender. To gain from the balance transfer as well as cover additional costs, look for a minimum 2% drop in the interest rate offered by the new lender.

Home loans and educational loans have tax deductions which tempt borrowers to continue paying the loan. However, tax benefits on loans should not be your primary reason for retaining the loan.Whenever you plan to borrow money, these five tips will guide you in making a valid decision. Before availing any loan, discuss with your spouse or other family members and make sure to keep them informed of any step you take. Thoroughly read the loan document for the terms and conditions so that unexpected clauses do not founder you during your loan tenure.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.