SMART BORROWING

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1. DON’T BORROW MORE THAN YOU CAN REPAY
The first rule of smart borrowing is what the older generation has been telling us all the time: don’t live beyond your means. Take a loan that you can easily repay. One thumb rule says that car EMIs should not exceed 15% while personal loan EMIs should not account for more than 10% of the net monthly income. “Your monthly outgo towards all your loans put together should not be more than 50% of your monthly income,” says Rishi Mehra . founder, Deal-4Loans.com.

2. KEEP TENURE AS SHORT AS POSSIBLE
The maximum home loan tenure offered by all major lenders is 30 years. The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 25-30 year loan. However, it is best to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high. In a 10-year loan, the interest paid is 57% of the borrowed amount. This shoots up to 128% if the tenure is 20 years.

3. ENSURE TIMELY AND REGULAR REPAYMENT
It pays to be disciplined, especially when it comes to repayment of dues. Whether it is a short-term debt like a credit card bill or a long-term loan for your house, make sure you don’t miss the payment. Missing an EMI or delaying a payment are among the key factors that can impact your credit profile and hinder your chances of taking a loan for other needs later in life.

4. DON’T BORROW TO SPLURGE OR INVEST
This is also one of the basic rules of investing. Never use borrowed money to invest. Ultra-safe investments like fixed deposits and bonds won’t be able to match the rate of interest you pay on the loan. And investments that offer higher returns, such as equities, are too volatile. If the market’s decline, you will not only suffer losses but will be strapped with an EMI as well.

5. TAKE INSURANCE WITH BIG-TICKET LOANS
If you take a large home or car loan, it is best to take insurance cover as well. Buy a term plan of the same amount to ensure that your family is not saddled with unaffordable debt if something happens to you. The lender will take over the asset (house or car) if your dependents are unable to pay the EMI. A term insurance plan of Rs 50 lakh will not cost you too much.

6. KEEP SHOPPING FOR BETTER RATES
A long-term mortgage should never be a sign-and-forget exercise. Keep your eyes and ears open about the new rules and changes in interest rates. The RBI is planning to change the base rate formula, which could change the way your bank calibrates its lending rates. Keep shopping around for the best rate and switch to a cheaper loan if possible.

7. UNDERSTAND THE FINE PRINT
Loan documents don’t make for light reading. Paragraph after paragraph of legalese printed in a small font can be a put off. Yet, read the terms and conditions carefully to avoid unpleasant surprises. Bengaluru-based Subhash Shetty applied for a personal loan of Rs 1 lakh but received a cheque of only Rs 91,800. The lender had deducted Rs 5,152 as an upfront interest charge and an annual insurance premium of Rs 3,047.

8. SUBSTITUTE HIGH COST LOANS
If you have too many loans running, it’s a good idea to consolidate your debts under one omnibus low-cost loan. Make a list of all outstanding loans and identify the high cost ones that can be replaced with cheaper loans. For instance, an unsecured personal loan that charges 18-20% can be replaced with a loan against life insurance policies. A loan against property can be used to repay all other outstanding loans. You could also consider other options like gold loans and loan against bank deposits. It is also a good idea to prepay costly loans as soon as possible. Divert windfall gains, such as annual performance bonus, tax refunds and maturity proceeds from life insurance policies towards repayment of these high-cost loans.

9. DON’T NIX RETIREMENT BY AVOIDING LOANS
Indians are emotional about certain financial goals, especially when these relate to children. Given a choice, no parent would want to burden their children with a loan, especially for the purpose of education. While securing your child’s future is important, you need to also assess if it impacts your own future. Dipping into your retirement corpus to fund your child’s education can be a risky proposition. Students have options like loans and scholarships to cover their education costs but there is no such arrangement to help you plan for your retirement needs. Your retirement is as important as your child’s education, perhaps even more. Do not plan for your children in isolation. Let all your goals be a part of your expense planning, it will help you balance better.

10. KEEP SPOUSE, FAMILY IN LOOP ABOUT LOAN
Before you take a loan, discuss it with your family. This is important because the repayment will impact the overall finances of the entire household. Make sure your spouse is aware of the loan and the reasons for taking it.

** Source: ET Wealth

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