Ten Golden Rules to Follow When Taking a Loan - The Economic Times

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<ul><li><p>Youarehere: ETHome Wealth SavingsCentre Analysis</p><p>ByNehaPandeyDeoras,ETBureau|14Sep,2015,10.44AMIST PostaComment</p><p>ETSPECIAL: Lovevisualaspectofnews?Enjoythisexclusiveslideshowstreat!</p><p>Tengoldenrulestofollowwhentakingaloan</p><p>Inanidealworld,everybodywouldhaveenoughmoneyforallhisneeds.Inreality,manyofushavelittleoptionbuttoborrowtomeetourgoals,bothrealandimagined.ForbanksandNBFCs,theyawninggapbetweenrealityandaspirationsisatremendousopportunity.Theyarecarpetbombingpotentialcustomerswithloanoffersthroughemails,SMSsandphonecalls.Somepromiselowrates,othersofferquickdisbursalsandeasyprocesses.</p><p>Technologyhaschangedseveralthingsforthelendingindustry.Onlineaggregatorshelpcustomerszeroinonthecheapestloanandbankstakelessthanaminutetoapproveanddisburseloans.ThepersonalloanfacilityfromHDFCBankistheUsainBoltofthefinancialworld.Ittakesjust10secondstodisbursealoantoitsNetbankingcustomers."It'sagamechangerfortheindustry,"claimsabankofficial.</p><p>Whiletechnologyhasalteredthewayloansarebeingdisbursed,thecanonsofprudentborrowingremainunchanged.Itstilldoesn'tmakesensetoborrowifyoudon'tneedthemoney.Ortakealongtermloanonlytoenjoythetaxbenefitsavailableontheinterestyoupay.Ourcoverstorythisweeklistsout10suchimmutablerulesofborrowingthatpotentialcustomersmustkeepinmind.Followthemandyouwillneverfindyourselfenslavedbydebt.</p><p>1.DON'TBORROWMORETHANYOUCANREPAYThefirstruleofsmartborrowingiswhattheoldergenerationhasbeentellingusallthetime:don'tlivebeyondyourmeans.Takealoan</p><p>SearchforNews,StockQuotes&amp;NAV's</p></li><li><p>thatyoucaneasilyrepay.OnethumbrulesaysthatcarEMIsshouldnotexceed15%whilepersonalloanEMIsshouldnotaccountformorethan10%ofthenetmonthlyincome."Yourmonthlyoutgotowardsallyourloansputtogethershouldnotbemorethan50%ofyourmonthlyincome,"saysRishiMehra,founder,Deal4Loans.com.</p><p>Canonlineloanportalsofferyouabetterdeal?</p><p>Withbanksfallingovereachothertoattractbusiness,takingaloanappearsaseasyasABC.Butdon'ttakealoanjustbecauseitisavailable.Makesurethatyourloantoincomeratioiswithinacceptablelimits.HyderabadbasedPhaniKumarhasbeenrepayingloansrightfromthetimehestartedworking.</p><p>ItstartedwithtwopersonalloansofRs5lakhsixyearsago.Atthattime,hewaspayinganEMIofRs18,000(or40%ofhistakehome).Despitestretchedfinances,KumartookacarloanofRs5.74lakhin2012,addinganotherRs12,500tohismonthlyoutgo.Lastyear,hetookathirdpersonalloanofRs8lakhtoretiretheotherloansandanothertopuploanofRs4lakhtomeetotherexpenses.Today,hepaysanEMIofRs49,900,whichisalmost72%ofhisnettakehomepay.IfyourEMIsgobbleuptoomuchofyourincome,othercriticalfinancialgoals,likesavingforretirementoryourkids'education,mightgetimpacted.Retirementplanningisoftenthefirsttobesacrificedinsuchsituations.Evenaftersixyearsofworking,Kumar'snetworthisinthenegative.Makesureyoudon'tcommitthismistake.</p><p>2.KEEPTENUREASSHORTASPOSSIBLE</p><p>Themaximumhomeloantenureofferedbyallmajorlendersis30years.Thelongerthetenure,theloweristheEMI,whichmakesitverytemptingtogofora2530yearloan.However,itisbesttotakealoanfortheshortesttenureyoucanafford.Inalongtermloan,theinterestoutgoistoohigh.Ina10yearloan,theinterestpaidis57%oftheborrowedamount.Thisshootsupto128%ifthetenureis20years.</p><p>IfyoutakeaRs50lakhloanfor25years,youwillpayRs83.5lakh(or167%)ininterestalone."Takingaloanisnegativecompounding.</p></li><li><p>Thelongerthetenure,thehigheristhecompoundinterestthatthebankearnsfromyou,"warnsfinancialtrainerP.V.Subramanyam.</p><p>Sometimes,itmaybenecessarytogoforalongertenure.Ayoungpersonwithalowincomewon'tbeabletoborrowenoughifthetenureis10years.HewillhavetoincreasethetenuresothattheEMIfitshispocket.Forsuchborrowers,thebestoptionistoincreasetheEMIamounteveryyearinlinewithanincreaseintheincome.IncreasingtheEMIamountcanhaveadramaticimpactontheloantenure.Assumingthattheborrower'sincomewillrise810%everyyear,increasingtheEMIinthesameproportionshouldnotbeverydifficult.IfapersontakesaloanofRs50lakhat10%for20years,hisEMIwillbeRs48,251.IfheincreasestheEMIeveryyearby5%,theloangetspaidoffinlessthan12years.IfhetightensthebeltandincreasestheEMIby10%everyyear,hewouldpayofftheloaninjustnineyearsandthreemonths.</p><p>3.ENSURETIMELYANDREGULARREPAYMENT</p><p>Itpaystobedisciplined,especiallywhenitcomestorepaymentofdues.Whetheritisashorttermdebtlikeacreditcardbilloralongtermloanforyourhouse,makesureyoudon'tmissthepayment.MissinganEMIordelayingapaymentareamongthekeyfactorsthatcanimpactyourcreditprofileandhinderyourchancesoftakingaloanforotherneedslaterinlife.</p><p>NevermissaloanEMI,evenifitmeansmissingotherinvestmentsforthetime.Inanemergency,prioritiseyourdues.Youmusttakecarenevertomissyourcreditcardpaymentsbecauseyouwillnotonlybeslappedwithanonpaymentpenaltybutalsobechargedaheftyinterestontheunpaidamount.</p><p>Ifyoudon'thavethemoneytopaytheentirecreditcardbill,paytheminimum5%androlloverthebalance.Butdon'tmakeahabitofthisbecauseataninterestrateof2436%,creditcarddebtisthecostliestloanyouwillevertake.Toavoidmissingtheduedateeverymonth,justgivestandinginstructionstoyourbanktopaytheminimum5%amountwheneverthebillisdue.4.DON'TBORROWTOSPLURGEORINVEST</p><p>Thisisalsooneofthebasicrulesofinvesting.Neveruseborrowedmoneytoinvest.Ultrasafeinvestmentslikefixeddepositsandbondswon'tbeabletomatchtherateofinterestyoupayontheloan.Andinvestmentsthatofferhigherreturns,suchasequities,aretoovolatile.Ifthemarketsdecline,youwillnotonlysufferlossesbutwillbestrappedwithanEMIaswell.</p><p>Therewasatimewhenrealestatewasaverycosteffectiveinvestment.Housingloanswereavailablefor78%andrealestatepriceswererising1520%.Soitmadealotofsensetobuyapropertywithacheaploan.Nowthetableshaveturned.Homeloansnowcost</p></li><li><p>around10%whilepropertypricesarerisingbybarely45%.Insomepocketstheyhaveevendeclinedinthepast12years.</p><p>Similarly,avoidtakingaloanfordiscretionaryspending.YoumaybegettingSMSsfromyourcreditcardcompanyforatravelloan,butsuchwantsarebetterfulfilledbysavingup."It'snotagoodideatotakeapersonalloanforbuyingluxurywatchesandhighendbags,"saysVineetJain,founderofLoanStreet.in.Ifyoumustgoonaholiday,throwalavishpartyorindulgeinsomeluxuryshopping,startsavingnow.Ontheotherhand,takingaloanforbuildinganassetmakeseminentsense.MumbaibasedSandeepYadavandhiswifejunkedtheirplanstogoonaforeignholidayandinsteadusedthemoneyforthedownpaymentoftheirhouse.Thiswaytheymanagedtobringdowntheoverallloanrequirementforthehouse.</p><p>5.TAKEINSURANCEWITHBIGTICKETLOANS</p><p>Ifyoutakealargehomeorcarloan,itisbesttotakeinsurancecoveraswell.Buyatermplanofthesameamounttoensurethatyourfamilyisnotsaddledwithunaffordabledebtifsomethinghappenstoyou.Thelenderwilltakeovertheasset(houseorcar)ifyourdependentsareunabletopaytheEMI.AterminsuranceplanofRs50lakhwillnotcostyoutoomuch.</p><p>Typically,bankspushareducingcovertermplanthatoffersinsuranceequaltotheoutstandingamount.However,aregulartermplanisabetterwaytocoverthisliability.Itcancontinueevenaftertheloanisrepaidorifyouswitchtoanotherlender.</p></li><li><p>Moreover,insurancepoliciesthatarelinkedtoaloanareoftensinglepremiumplans.Thesearenotascosteffectiveasregularpaymentplans.Ifalenderforcesyoutobuyaninsuranceplanthatislinkedtotheloan,takeupthematterwiththebankingombudsmenandtheinsuranceregulator.6.KEEPSHOPPINGFORBETTERRATES</p><p>Alongtermmortgageshouldneverbeasignandforgetexercise.Keepyoureyesandearsopenaboutthenewrulesandchangesininterestrates.TheRBIisplanningtochangethebaserateformula,whichcouldchangethewayyourbankcalibratesitslendingrates.Keepshoppingaroundforthebestrateandswitchtoacheaperloanifpossible.</p><p>However,thedifferenceshouldbeatleast2percentagepoints,otherwisetheprepaymentpenaltyontheoldloanandprocessingchargesofthenewloanwilleatintothegainsfromtheswitch.</p><p>Also,switchingwillbemorebeneficialifdoneearlyintheloantenure.Supposeyouhavealoanat11.75%andarebeingofferedanewrateof9.9%.Youcansaveupto52EMIsiftheloanstillhas18yearstogo.Butiftheloanonlyhasfivemoreyearstogo,thenewloantenurewillbeonlythreeEMIsshorter.Thesameappliestoprepaymentofloans.Theearlieryoudoit,thebiggeristheimpactontheloantenure.TheRBIdoesnotallowbankstolevyaprepaymentpenaltyonhousingloansbuttheymaylevyapenaltyonotherloans.Somelendersdonotchargeaprepaymentpenaltyiftheamountpaiddoesnotexceed25%oftheoutstandingamountatthebeginningoftheyear.</p><p>7.UNDERSTANDTHEFINEPRINT</p><p>Loandocumentsdon'tmakeforlightreading.Paragraphafterparagraphoflegaleseprintedinasmallfontcanbeaputoff.Yet,readthetermsandconditionscarefullytoavoidunpleasantsurprises.BengalurubasedSubhashShettyappliedforapersonalloanofRs1lakhbutreceivedachequeofonlyRs91,800.ThelenderhaddeductedRs5,152asanupfrontinterestchargeandanannualinsurancepremiumofRs3,047.</p></li><li><p>Shettyhadsignedonthepaperswithoutgoingintothefineprint.Somelendersarenotoriousforslippinginclausesthatareloadedagainsttheborrower.Ifyouareunabletounderstandthelegalese,getafinancialadvisororcharteredaccountanttotakealookattheagreementbeforeyousignit.8.SUBSTITUTEHIGHCOSTLOANS</p><p>Ifyouhavetoomanyloansrunning,it'sagoodideatoconsolidateyourdebtsunderoneomnibuslowcostloan.Makealistofalloutstandingloansandidentifythehighcostonesthatcanbereplacedwithcheaperloans(seetable).Forinstance,anunsecuredpersonalloanthatcharges1820%canbereplacedwithaloanagainstlifeinsurancepolicies.</p><p>Aloanagainstpropertycanbeusedtorepayallotheroutstandingloans.Youcouldalsoconsiderotheroptionslikegoldloansandloanagainstbankdeposits.Itisalsoagoodideatoprepaycostlyloansassoonaspossible.Divertwindfallgains,suchasannualperformancebonus,taxrefundsandmaturityproceedsfromlifeinsurancepoliciestowardsrepaymentofthesehighcostloans.</p><p>Borrowerssometimesavoidendingloansbecausetheyoffertaxbenefits.Ifahouseisselfoccupied,uptoRs2lakhinterestpaidonahomeloancanbeclaimedasataxdeduction.Ifthehouseisgivenoutonrent,theentireinterestpaidcanbeclaimedasdeduction.Incaseofeducationloans,theentireinterestpaidontheloanistaxdeductibleforuptoeightyears.Butthistaxbenefitaloneshouldnotbethereasontokeepaloanrunning.True,thetaxbenefitsbringdowntheeffectivecostoftheloan.</p></li><li><p>Butyouarestillincurringanexpensethatcanbeavoidedbyendingtheloanassoonaspossible.Unlessthemoneycanearnyouabetterreturnthantheeffectivecostoftheloan,useittoprepaytheoutstandingsum.</p><p>9.DON'TNIXRETIREMENTBYAVOIDINGLOANS</p><p>Indiansareemotionalaboutcertainfinancialgoals,especiallywhentheserelatetochildren.Givenachoice,noparentwouldwanttoburdentheirchildrenwithaloan,especiallyforthepurposeofeducation.Whilesecuringyourchild'sfutureisimportant,youneedtoalsoassessifitimpactsyourownfuture.</p><p>Dippingintoyourretirementcorpustofundyourchild'seducationcanbeariskyproposition.Studentshaveoptionslikeloansandscholarshipstocovertheireducationcostsbutthereisnosucharrangementtohelpyouplanforyourretirementneeds.Yourretirementisasimportantasyourchild'seducation,perhapsevenmore.Donotplanforyourchildreninisolation.Letallyourgoalsbeapartofyourexpenseplanning,itwillhelpyoubalancebetter.10.KEEPSPOUSE,FAMILYINLOOPABOUTLOAN</p><p>Beforeyoutakealoan,discussitwithyourfamily.Thisisimportantbecausetherepaymentwillimpacttheoverallfinancesoftheentirehousehold.Makesureyourspouseisawareoftheloanandthereasonsfortakingit.</p></li><li><p>OtherTimesGroupnewssites</p><p>TimesofIndia | | MumbaiMirrorTimesNow | Indiatimes | | LifehackerGizmodo | Eisamay | IGNIndiaNavGujaratSamay</p><p>LivingandentertainmentTimescity | iDiva | BollywoodZoom | Healthmeup | LuxpressoTechnology | Guylife | OnlineSongs | TravelGuides | HotelReviews | Cricbuzz.com</p><p>Networkingitimes | Dating&amp;Chat | EmailMensXP.com</p><p>HotontheWebDailyHoroscope | WeatherinDelhiMumbaiMap | HoroscopeHotelsinDelhi | XiaomiMobilePhones</p><p>ServicesBookprintads | Onlineshopping | FreeSMS | Websitedesign | CRM | TendersMatrimonial | Ringtones | Astrology | Jobs | Property | Buycar | BikesinIndiaUsedCars | OnlineDeals | RestaurantsinDelhi | MovieShowTimingsinMumbaiRemittoIndia | BuyMobiles | ListenSongs</p><p>Aboutus / Advertisewithus / TermsofUse&amp;GrievanceRedressal / PrivacyPolicy / Feedback / Sitemap / CodeofEthics / Disclaimer Copyright2015Bennett,Coleman&amp;Co.Ltd.Allrightsreserved.</p><p>LiveMarket News Portfolio Mobile LiveTV Newsletter Commodities Speed QnA Blogs Alerts</p><p>Keepingaspouseinthedarkonmoneymattersnotonlyincreasesstressinamarriagebutalsoprecludesyourchancesoffindingamorecosteffectivesolution.Maybeyourwife(orhusband)hassomesparemoneywhichcanhelpyouavoidtakingtheloanaltogether.Don'tmissoutonthatopportunitybykeepingyourneedunderwraps.</p><p>StayontopofbusinessnewswithTheEconomicTimesApp.DownloaditNow!</p></li></ul>