In an ideal world, everybody would have enough money for all his needs. In reality, many of us have little option but to borrow to meet our goals, both real and imagined. For banks and NBFCs, the yawning gap between reality and aspirations is a tremendous opportunity. They are carpet bombing potential customers with loan offers through emails, SMSs and phone calls. Some promise low rates, others offer quick disbursal and easy processes. Technology has changed several things for the lending industry.
Online aggregators help customers zero in on the cheapest loan and banks take less than a minute to approve and disburse loans. The personal loan facility from HDFC Bank is the Usain Bolt of the financial world. It takes just 10 seconds to disburse a loan to its Net banking customers. "It's a game changer for the industry," claims a bank official. While technology has altered the way loans are being disbursed, the canons of prudent borrowing remain unchanged. It still doesn't make sense to borrow if you don't need the money. Or take a long-term loan only to enjoy the tax benefits available on the interest you pay.
Our cover story this week lists out 10 such immutable rules of borrowing that potential customers must keep in mind. Follow them and you will never find yourself enslaved by debt.
1. DON'T BORROW MORE THAN YOU CAN REPAY
The first rule of smart borrowing is what the older generation has been telling us all the time: don't live beyond your means. Take a loan that you can easily repay. One thumb rule says that car EMIs should not exceed 15% while personal loan EMIs should not account for more than 10% of the net monthly income. "Your monthly outgo towards all your loans put together should not be more than 50% of your monthly income," says Rishi Mehra, founder, Deal-4Loans.com.
2. KEEP TENURE AS SHORT AS POSSIBLE
The maximum home loan tenure offered by all major lenders is 30 years. The longer the tenure, the lower is the EMI, which makes it very tempting to go for a 25-30 year loan. However, it is best to take a loan for the shortest tenure you can afford. In a long-term loan, the interest outgo is too high. In a 10-year loan, the interest paid is 57% of the borrowed amount. This shoots up to 128% if the tenure is 20 years. If you take a Rs 50 lakh loan for 25 years, you will pay Rs 83.5 lakh (or 167%) in interest alone. "Taking a loan is negative compounding. The longer the tenure, the higher is the compound interest that the bank earns from you," warns financial trainer P.V. Subramanyam.
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