Money Matters: Borrowing Alert
By: Dr. Preeti Singh
Tags: Financial Planning, Money, Loans, Self Improvement Tips, Finance

Money Matters: Borrowing Alert

Photo by Priscilla Du Preez on Unsplash

Do you receive phone calls and messages from banks? You qualify for a loan! You have a great credit score!

I like you, also receive messages, calls and emails but I see through them. Banks have their own business to carry on. They keep on luring people to take a loan.

How does it benefit a bank? A bank charges interest. This is a source of earning for them.

The bank has a system of receiving interest on loans and paying interest on your savings accounts and fixed deposits with it.

It pays a very low rate of interest but charges a very high amount. The margin is very wide. For example, if they are paying 6% on fixed deposits, they are charging 12% on loans.

Why are loans important? Loans are very important because at times you do require extra funds to buy things for your self or your house and you cannot immediately pay for it. You can, however, spread it over a few months or a few years and can own the product of your desire.

What are the products that people usually prefer to take loans for?

There are two categories of loans. These are personal loans and business loans.

Personal loans are usually for buying mobile phones, televisions, washing machines, cars, and real estate, gold and silver, diamonds and stock exchange purchases.

Business Loans are taken by startups, working capital requirements or for expansion and extension purposes.

Here we are dealing with personal loans but the same applies to business loans. Business often fails because people take working capital loans and do not repay in the given time. They take loans above their capacity and are unable to return their instalments or they do not look at the fine print thus becoming bankrupt.

What are the takeaways?

1.How much loan should one take? The loan should be taken to the extent it can be returned. Each person has a pocket that he alone knows. He should determine his expenses and see how much he can return every month.

2. Equated monthly instalments(EMI): He should then agree to set a period where he can pay through monthly instalments. This is also called equated monthly instalments. What is important is a person cannot pay more than 10–15% of his monthly takehome salary. He should try to settle for it with the bank or he will be burdened too much.

3. Payment of EMI on the due date: When a person takes a loan, he should clearly ask the date of the monthly return of the loan. He should pay his instalments on the due date and remember that the payment should not be delayed.

If you skip a month, the payment will never be on time and you will have an increased debt every month payable with interest. This will increase your debt.

4.Tenure of loan: Loans should not be taken for long periods of time. It keeps the budget strained until the amount is paid off.

Real estate can be a longer period loan. Mobile phones and other white goods should be paid between 6 months and one year. A car or motorcycle loan between 3–5 years.

5. Read the fine print below: Before deciding from where to take a loan, the point that should be remembered by you is that there is always a very fine print below the contract.

This small print, we do not read even though all the banks providing loans state that you should read the risk involved. You are supposed to sign below so that you agree to the terms and conditions. In your own interest do read what it says.

6. Take loans but monthly savings should continue: The loan that you take is not in lieu of your savings plan.

The monthly savings cannot be ignored and has to continue despite your additional liability. This is the most important point to remember.

To conclude, We must remember that the monthly budget is very important. We must judge our expenses and only then buy products which are of interest to us. If there is no option but to take a loan, then calculate your take-home income. EMI’s should be between 10–15%. A savings investment plan should continue. The tenure of loan should be for short periods so that the household is not continuously burdened for small luxuries.