Borrowing: The loan survivor

Published: February 20, 2015 12:54 AM

Borrowing is the easy way out when in a spot, but be aware of the pitfalls — mistakes can prove dear.

These days loans are readily available for almost all financial needs. Whether you are buying a home or a car, or arranging funds for your child’s education, there is a loan facility for just about every financial goal.

Though loans have become popular over the years, consumers still commit some fundamental mistakes that cause heartburn later. Instead of blaming the lender, the onus of avoiding mistakes while taking a loan lies with you, the borrower. Here are some common pitfalls to avoid while taking a loan.

Ignoring the fine print

A common mistake that borrowers commit is skipping the fine print. Many people simply sign on the dotted line as told by the loan advisor, relying solely on the latter’s word regarding the terms and conditions. In such a case, if something goes wrong, one wouldn’t be able to claim that one wasn’t aware of the terms.

What you should do: Always read the fine print of the loan document, irrespective of how small the amount is. Do not hesitate in seeking clarifications from the bank or NBFC if you find something objectionable or difficult to understand.

Borrowing for a friend

Though a friend in need is a friend indeed, taking a loan on behalf of a friend is not wise. Many people allow emotion to get the better of them and take loans on behalf of friends and relatives. Any default on the loan by your friend or relative could ruin your Cibil score, and if they are not in a position to repay the loan, you would be legally bound to repay as a co-borrower or loan guarantor.

What you should do: Never borrow on behalf of friends or family unless you must. Avoid being the guarantor for such loans as far as possible.

Buying on impulse

If you are someone who borrows without thinking twice, you need to change your habit, else you will soon find yourself in a big financial mess. Retailers may attract you with billboards declaring 0% interest and EMIs. But, remember, as a rule, not more than 40% of your monthly income should go towards loan repayment. This includes your home loans, car loans and all other borrowings, such as education or personal loans. If more than 40% of your monthly income goes towards servicing loans, it means you are at a high risk of getting trapped in a loan default cycle.

What you should do: Avoid unnecessary loans, especially personal loans and credit card loans, unless it is the only way to tide over a financial crunch.

Supplying wrong information to bank

Many people think they can get away by hiding uncomfortable information from the bank. Hiding such information or giving wrong information is a serious crime, which may have serious consequences. Supply the bank with the right information when it comes to details of other loans, financial status etc.

What you should do: Make sure that the information you share is true to the best of your knowledge.

Not doing adequate research on options

Just like any other industry, the financial services industry has evolved over the years. There are a number of banks and non-banking financial companies offering various kinds of loans. Just because a bank is offering a pre-approved loan or you have an account with them, does not mean you are getting the best deal. Research your options carefully and check with various banks and NBFCs on their loan terms, interest rates and other details before shortlisting the lender.

What you should do: A little research goes a long way. Spend some time comparing loan terms and conditions, total loan cost etc of various banks and NBFCs.

Not maintaining accurate records, statements

When was the last time you checked your bank loan statement? Chances are it is lying in some corner of your home or office. Maintain a record of all your bank statements, including the amount of loan disbursed and the repayments made, along with copies of the loan agreement. In case of a dispute with the bank, the documents must be complete for effective defence.

What you should do: Always keep a record of your loan agreement, statement and repayment history compiled and up to date.

Adhil Shetty

The writer is CEO,

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