Basic Rules to Follow When Taking a Loan

Basic Rules to Follow When Taking a
Loan
Loans are the survival tool for many people these days. Loans get you the
money at the time of need in a hassle free manner. The biggest advantage of
having a loan is you don’t need to borrow from your friends/family and the
interest which you have to pay along with your loan is affordable and pocket
friendly. The repayment options with loans are also in favour of the borrower
as it is repaid in monthly instalments known as EMIs with repayment tenures as
long as 30 years as in case of home loans and along with part payments and pre
closures, which are some of the facilities available now a days.
However there are some rules which one should follow when taking any Loan
to make it more comfortable and hassle free process.

EMI of Your Loan Should be Affordable
A smart borrower is the one who never bite off more than he can chew
comfortably. It’s always important to take care that your loan EMI should never
be a burden on you. Your car EMI should not exceed 15% of your total monthly
income while your personal loan EMIs should not be more than 10% of your net
monthly income. It is always suggested that the total monthly outgo towards
your all loans should not exceed 50% of your net monthly income.
The loan-to-income ratio should always be acceptable and it should be in limit.
If you don’t maintain this it can cause trouble. This will not allow you to focus
on your other financial goals. Moreover it gives you a financial burden and
mental stress too.
Always Compare
We go to multiple stores to compare price and quality of a particular product
when we decide to purchase it. Whether it is a small thing or a big one we all
get active in terms of purchase bargaining and finding the best deal available.
Same approach is required as well in case of financial products too especially
loans. There are a number of banks offering different kind of financial products
at different rates. But it is a matter of fact that the rate of a financial product
may varies from lender to lender. Say HDFC is offering Personal Loan at an
interest rate of 15.75% p.a. whereas it is possible that ICICI may offer the same
personal loan at an interest of 11.59% p.a. So, in this case if you go with HDFC
just because you were unaware about the ICICI interest, you would definitely be
in loss, paying more on the interest. Hence, it very important to compare first
and then decide.
Do the Math
Having more amount than your need – This thought of having more money is
tempting itself. This temptation leads to applying for a loan amount which is
more than the requirement. This might seem to be a smart option to many of

you but it can be a burden for your future. If the loan amount is increased it
doesn’t come alone. Loan amount increases with the tenure, EMI and many
other things. It is always a good idea to borrow amount which is equivalent to
the money you need.
Each category of loan has a certain upper limit. It is never a good thing to
borrow more just because lenders are willing to offer money up to this limit
doesn’t mean that we should jump at this thought.
The amount you borrow should be such that it is easily repayable. It is always
important that to compute your finances and then borrow accordingly.
Tenure Should be Short
Borrowers may go for a long-term loan because in this case the EMIs is lower
and the borrower enjoy tax breaks on the loan. But it’s a matter of fact that long
tenure ends up by paying more on the interest. Though tax benefits provided
brings the effective cost of the loan down.
However, going for a short-term loan may not always be possible for all
borrowers. Many people such as young salaried employees with low incomes
may not be able to afford a short tenure as in short term loans the EMIs are
always high. But then also it’s the best option to repay the loan as fast as
possible by increasing the EMI. EMIs should be increased with the increase in
the income.
Don’t Skip the Terms and Conditions Section
When you go for a loan you need to sign a loan agreement. The loan agreement
consist of terms and policies regarding the loan and many legal things about the
loan. In case if you are unable to repay the loan the banks have the full authority
to take any action against the borrower but that should be under the terms and
condition.