In an ideal world, everybody would have enough money to cover all their expenses. Unfortunately, many of us must borrow money to realize our dreams and goals. The gap between reality and our aspirations is a great opportunity for banks. Potential customers are being bombarded with loan offers by banks and NBFCs via emails, SMSs, phone calls, and other means.
So, the lending industry has experienced many technological changes. Although technology has changed how loans are disbursed, the rules of prudent borrowing have not been altered. It doesn’t make financial sense to borrow money if you don’t actually need the money or apply for a loan for a long time to receive the tax benefits of the interest you pay. Here, we tell you how to choose a loan according to your income and discuss some dos and don’ts about borrowing money that will keep your worries at bay.
Choosing a loan according to your income—
The first rule of smart borrowing: Do not live beyond your means. This is what our older generations have been telling us for years. It is best to borrow money that you can repay. As a general rule, car EMIs should not exceed 15 percent, and personal loan instalments must not exceed 10% of your monthly net income. Your monthly outgo towards all your loans combined should not exceed 50 percent of your monthly earnings. If, however, you don’t have a great credit report, it might not be easy for you to take a loan. In such a scenario, you can opt for a gold loan. Gold loans are approved even when the credit score of the applicants is low. However, it’s best to look for the highest gold loan per gram before applying for a loan.
Tips to Avoid Being a Slave of Your Debt—
- Go for a short-term repayment tenure:- Different loan tenures are applicable for different loan categories. Take, for instance, a home loan. Today, all major lenders offer 30-year home loans. The EMI is lower for longer terms, making it tempting to get a 25-30 year loan. However, the best option is to borrow for the shortest term possible. The interest expense for a long-term loan can be too high. A 10-year loan will result in interest payments of 57% of what was borrowed. If the tenure is for 20 years, this number jumps to 128%.
- Maintain regularity in terms of repayment:- You should be disciplined when it comes to repaying dues. Pay your dues on time. Paying late or missing an EMI can have a negative impact on your credit score, which could affect your ability to borrow money later.
Try not to miss a loan EMI. In an emergency, prioritize your dues. It is also important to pay your credit card bills on time. Otherwise, you could face a stiff interest charge and a non-payment penalty. If you don’t make enough to pay the full credit card bill, then pay the minimum 5% or rollover your balance.
Lastly, here is a piece of advice: don’t take a loan to spend on luxury or for investment. Nonetheless, if you are in need of urgent funds, you can choose to go for a gold loan. Check the gold loan amount per gram, consider the various options you have at hand, and choose accordingly.