For a 20-something married person, the very phrase ‘taking a loan’ tends to induce a panic stricken reaction (take precautions if you have a weak heart). The reason is obvious – in simple terms, loan is all about being in debt, and debt is something you would want to stay very far away from. For a married man in his twenties, being in debt can always play on the back of his mind while making any significant financial decisions – especially with respect to his family’s financial security. This ‘worry’ will stem from the fact that there is so much at stake – like children’s (if any) education. To safely navigate around the by lanes and alleys of the ‘loan’ maze, we are going to give you a tried and tested map. So, here are 6 essentials you need to consider when applying for a loan –
Things to check before applying for a loan!
- Is it the NEED or the GREED?
‘Do you really need the loan?’ is the first question to ask yourself while applying for a loan. There is an old saying “don’t live beyond your means” which has time and again proved to be right. So if you are looking to splurge on a luxury car or a vacation by taking a loan, it’s a bad idea! Discretionary spending such as these are better off dealt with your own money, not borrowed money. Similarly in an urge to make more money, don’t borrow to invest. If you invest the borrowed money in very low risk instruments such as bonds and fixed deposits – the rate of return will be lower than your interest rate. Likewise, investing in equities that generate high returns come with the risk of high volatility. What about real estate? Not a good option either. Home loans have interest rates of above 10%, so the idea of using a loan to purchase a cheap property and then selling it off later for a higher sum of money won’t work. Also property prices across the country are increasing at a very slow pace (4% – 5%), even decreasing in certain pockets.
- Are you borrowing too much?
The most important rule of smart borrowing is to borrow only when you can pay it back. If you borrow a large amount that you may have difficulty in repaying, skip it. It is never a good scenario when the EMI (easy monthly installments) of your loan is eating too much into your income, as that would spell bad news for other critical financial avenues such as your retirement plan and children’s college fund. It may sound a little far-fetched to think of these things now, but you know what they say about safe than sorry.
Expert tip – Ensure that the monthly outgo for all your loans does not exceed 50% of your income. You should not opt to take a loan simply because it is available, so asses your need carefully as explained in the preceding point.
- Are you insured?
Just like having lifeboats are essential for a ship, having an insurance policy is essential before applying for a loan, both are needed to stay afloat in case of any eventuality. To ensure that your family is not left with mounting debt such as paying off the loan EMI should you pass away in an untimely manner, purchase a good Life insurance plan.
Expert tip – Banks generally offer insurance plans linked to loans but it is recommended to opt for regular insurance plans. The reason being that you can continue with the scheme even after the loan is repaid or you shift to a different lender.
- How much are the penalty charges?
Lenders levy penalty charges when you fail to make payments on time. The penalty charges are generally high and are charged onto your outstanding loan amount. These charges are unnecessary and can be avoided if you plan out your loan carefully.
Expert tip – Read the fine print carefully before signing. It is best to find out complete details about such charges, in the beginning, to assess how affordable a loan is.
- How likely are you to get a loan?
Lenders go through your credit score before sanctioning a loan. Your credit score is an analysis of your credit history (dues and debts), based on which you avail a loan. The lower your credit score is, the lesser the chances of securing a loan. Of course different lenders have different standards when it comes to credit scores, so do your homework carefully.
Expert tip – Make sure that all your dues and debts are cleared before applying for a loan, as this will be reflected in your credit history during the application process.
- Are you getting the best deal?
How do you know whether you are getting the best lowest rates for this particular loan? The only way to find out is a careful survey of the competition. Check out the interest rates of other lenders in that category before finalizing on one. In addition to the rates, some lenders also give you the flexibility to modify the tenure of your EMIs.
Expert tip – Opt for a loan that has the lowest interest rate and also offers room for flexibility when it comes to the tenure of your EMIs.