Whether buying a new car is on your wish list or you want more money to make your wedding more extravagant or you are planning to buy a house, there is a possibility that you will be turning to loan providers. Taking a loan is a big financial step, and one should not take it lightly at any cost. So, here’s a rundown of five things to consider when taking a loan.
Borrowing more than you can repay is the biggest mistake that many individuals commit. Take loan that you can repay without any financial struggle. For instance, if you are taking car loan, the EMI should not be more than 15 percent of your monthly income. The thumb rule is that the total loan amount that you pay should not be more than 50 percent of what you earn every year.
Though longer tenure means you will have to shell out lesser monthly EMIs, but there are a few disadvantages that you should be aware of. The interest rate in long-term loan is high. For instance, if you take a loan for 10 years, you will be paying approximately 57 percent interest on the borrowed amount. The interest will, however, be 128 percent if the tenure is 20 years.
Borrowing to invest the money somewhere else is a bad financial decision because fixed deposits, bonds and other investment options have lower interest rates than what you will be paying back as monthly installment for the loan. Also, don’t take loan to splurge on holiday, expensive clothes and accessories, or parties.
The rules and interest rates keep changing, so it is always a good habit to keep your eyes and ears open for better deals. Change your lender only if there is a different 2 percentage points, else the prepayment penalty and processing charges will not leave you with any additional benefit. Also, changing the lender is beneficial in early months or years of loan tenure, as you will save more on EMIs in the long run.
Always keep your spouse or family informed, when you are applying for loan. There’s a possibility that they might help you by offering their savings. And even if that doesn’t happen, you must discuss the financial decision for their advice and suggestions. Another factor to keep in mind is to take quotes from at least five to six lenders for loans online. Fast approval, credit score, and customer satisfaction are some other criteria to consider while making a decision.