We live in an age of credit, and technology has made it easier for people to compare interest rates offered by different banks and lenders, and find out the best option that matches their needs. However, given the recent economic scenario, borrowing has become an expensive proposition. While borrowings from banks attract hefty interest rates, credit cards are the worst. Depending on the amount that you want to borrow, the options vary.
If you are planning to borrow money, here are some tips you should follow:
Don’t borrow more: First, see if your needs can be met from other sources so that you do not have to borrow at all. If you do borrow, see to it that your EMI out-go does not exceed 40 per cent of your total monthly income. If you see the EMI is 50-70 per cent of your income, know that it will be extremely difficult for you to save for the future. Use an EMI calculator before you take a loan, and find out the monthly EMI outgo. Experts suggest borrow an amount that keeps your debt-to-income ratio within acceptable limits.
The most important thing to keep in mind is that don’t borrow more than what you can repay.
Don’t borrow to splurge: Most importantly, this is not the time to borrow money to splurge or give in to discretionary expenses. Taking up debt for any type of entertainment expenses or gadgets has the highest potential to pull you into a debt trap. Also, do not ever borrow to invest as no investment can meet the cost of a loan.
Loan tenure: Keep the loan tenure short. Even though banks offer longer loan tenures, however, that is just to lure customers into paying smaller EMIs every month. Usually, the longest tenure is offered in case of home loan and it can go as long as 30 years. Note that, a long tenure also calls for higher interest pay-out. If you are not sure, use an EMI calculator to ascertain the EMI with different tenures and then select the shortest one that fits your budget.
Look for lower rates: With the balance transfer option, you can transfer your loan to lower rates. Hence, why should you keep paying high rates of interest when you can transfer the balance? So keep looking out for such offers, as banks and NBFCs keep coming up with various offers.
The earlier you transfer your balance to a lender offering a lower rate, the more it will be beneficial for you. Additionally, always compare the cost of foreclosure if you are looking to prepay your loan. Compare the forclosure cost with the amount you would save and foreclose it only when the savings are significant.
Don’t just wait to avail tax benefits: As the government offers tax benefits on some loans, there are borrowers who keep loans running just to avail tax benefits. For instance, a tax deduction is offered on home loans u/S 24 and 80EE of Income Tax Act. Additionally, the interest paid on education loans is also fully deductible. Note that, even though these benefits can help reduce the overall cost of the loan, one should not keep the loan running just for tax benefits.