Everyone needs money for their day to day life, to fulfill their requirements, their dreams and for their better future.
In today’s competitive world a person can never be satisfied with some things and money he already possesses. He always wants more and more in addition to his limited income.
From there comes the demand for a loan.
So, if you too need a loan to fulfill your dream – perhaps you want to buy a car and are short on money, plan to make a trip abroad, need money to renovate your house or plan to buy a new one, then you must read this post before applying for a loan.
Here, we have listed out things to know before taking a loan.
Nowadays, it has become easy to apply and get a loan from a bank. So, people are seen running after banks to get a loan. Whenever they are short of money, they go up to a bank and apply for a loan.
However, there is nothing wrong in applying for a loan; still, there are many fine points which you must consider to avoid falling into the trap of a loan. The loan you should take should be to your advantage and should not come up as a burden which you find difficult to repay.
In fact, Loan is nothing but a form of debt and with a regular interest payment. In simple language loan is taking money from an individual or bank and you need to repay it after a period with the pre-decide interest rate.
If you need a loan, you just have to go to the bank and tell the bank about your requirement of loan for example to buy a house.
Bank will enquire about your financial condition and some more general information about you and can give you a loan to buy your dream home. But ultimately the property for which bank is providing you loan is of the bank until you pay all the money back with interest to the bank.
In today’s modern world it is relatively easy to get a loan from the bank. If you have a good job or business and bank feels that you can repay the amount the bank easily give you a loan.
Loans are available not only to buy a house, but you can also get a loan to buy a car, to start your new business, child marriage, to fund your education, and much more. Many people take loans even to finance their holidays.
Due to easy availability of loans and never ending demand of things, peoples have started taking loan very often without prior information about the consequences you have to face after taking a loan.
If you are also thinking of taking a loan, then wait a minute and ask yourself few questions.
Since having a loan is a long time commitment with the bank or an individual you should think about it thoroughly and wisely that do you need it. How are you going to pay back? Is your resource enough? Do you have a backup option?
So, before taking a loan, you should be aware of bank policy and related issues governing loans. In general, there are rules to follow when taking a loan. It will make your life much easy and you will never feel the burden of the loan on your shoulders.
Before taking a loan go through these several points.
It is a must for you before you go for a loan.
These are the golden principles of the things you need to know before going for a loan.
Important Points Before Taking Loan
1. Smart Borrowing
The first golden rule of smart borrowing emphasizes the age-old principle: don’t live beyond your means. So, you should not borrow more than you can repay. You should not take a loan just because it is available. As such, your loan-to-income ratio should be within acceptable limits.
As a general rule, all your monthly outgo towards all your loans should not exceed more than 50% of your monthly salary or income. Moreover, if your loans EMIs eat up much of your income, you can end up falling short of meeting several of your critical financial goals such as retirement planning, your kid’s education, and stuff like that.
So, access your money requirement critically and go for smart borrowing so that you avoid getting into the trap of paying heavy EMIs and failing to meet your other financial commitments.
2. Get the Best Deal
Although availing a loan has become easy, but this does not mean that you go for a loan from any bank that you come across. Your main focus should be to get the best deal. So, shop for best interest rates. It will help you to reduce the EMI as well as the loan tenure.
Keeping your loan tenure as short as possible relieves you of your debts earlier. You can also switch to a cheaper loan when possible.
Moreover, if you can pay larger EMIs, go for short term loan options. You should also reduce the loan tenure if your income increases.
Foreclosure is another option which you can consider if you happen to save enough money for closing your loan account before the loan term. It is a good habit to weigh all pros and cons before choosing a loan option.
3. Take a Loan for a Productive Purpose
Always access your loan requirement and take a loan for a productive purpose. Productive means is it going to yield you some benefits so that you can repay it.
If you are going to take a loan for buying a home for living then taking a loan can be useful, but if you are taking a loan for buying a luxury car, then it is not advisable.
Many people now a day’s take a loan for financing their holidays. Holiday is an unproductive work it’s not essential for living life it is consuming your money.
According to me if you do not have enough resources to go for an expensive holiday go for a cheaper one. You can also postpone it for the time being and avoid taking a loan.
4. Don’t Default or Delay on EMIs
Whenever you are repaying your dues whether it is a credit card bill or a home loan, make sure you don’t miss the payment.
So, it is important to plan your expenditure in such a way so as to leave the amount necessary to repay your EMIs timely. Missing an EMI or delaying it, hampers your credit score and reduces your chances of taking a loan for other needs.
So, whenever you go out and plan your expenditure put the loan EMI on top of the list. Whenever you are short of funds, it is better to miss out on investments for the time being rather than to default or miss out on EMIs.
Always make the habit to keep the EMI amount aside before you go on to make any payments. If by any chance, you miss paying your EMI, inform your lender and keep him updated on your condition.
If you are unable to pay back the loan or you default in your installment regularly your market credit rating is affected. You will face many problems in taking any other loan further in your life.
The title of being a defaulter will follow you where ever you go. Your low credit scores will affect your Goodwill a lot. Your credit history is an important point to consider while you are taking a loan.
5. Know the type of Interest Rate
Another important thing to consider before taking a loan is the type of interest rate, whether it’s fixed or flexible. Fixed means you have to pay a fixed sum of money which is pre-decided. Fixed rate do not change, don’t take the change in inflation rate during the period of your loan.
On the other hand, flexible interest rate changes depending on the state of your economy it will take into account the level of inflation in your economy.
It will be beneficial for you if the interest rate falls and it can be a disadvantage if it rises. If you are taking floating loan and interest rates hikes in futures then are you ready to pay that increased amount?
6. Understand the Fine Print
Many times there are hidden charges these can create a problem for you in future. People do not read the contract carefully before signing it, and in the end, it turns up with the extra burden.
You have to pay these extra charges because you are legally bound. Check the hidden charges properly before signing any contract, ask freely if you have any query about your loan do not hesitate.
7. Take Insurance Cover for Big-Ticket Loans
If you happen to take a big home loan or even a car loan, remember to take insurance cover as well. It is advisable to take a term plan for the same amount so as to relieve your family from any financial burden in case something happens to you.
Moreover, a term insurance will not cost you much. So, you should go with a regular term plan so as to cover your liability in full.
It will help you to not only protect the asset for which you have taken a loan but also ensure that your family is free from any financial obligation in case something happens to you.
Typically, banks offer a reducing cover term plan or single premium insurance plans linked to a loan. However, you should consider other options as well before finalize your insurance cover for Big-Ticket Loans.
Many a time people took hasty decisions while taking a loan they do not take into considerations some very important points such as what if they met an accident, what if they lose their jobs, what if they suffer a great loss in their business how will you repay, have you created any backup option.
In some rare condition if a person dies who is going to repay the amount, are you prepared for meeting such unaware consequences?
You can go for a loan protection insurance plan for meeting these types of extreme conditions.
8. Think Twice before taking a loan
Taking a loan means getting into a long term contract with the bank or an individual. You have to deal with it for a specific period, which involves a regular monthly installment.
If you default in any of your installment, you will be penalized with an extra amount which is very high. Think twice before taking a loan that will you be able to pay installments on time?
9. Remember This Before Taking A Secured Loan
If you have taken a loan against your property in the form of collateral the bank will cease your property if you do not repay the loan amount with interest.
Bank can even sell your property to raise the money that you owe to bank. You can even lose the property you already possessed while meeting your other contingencies.
Taking a loan can be a good deal, or a bad deal varies from person to person.
However, it is of great importance that you take the time to review why you are considering a loan, what another alternative you can have a loan and foremost what are you hoping to achieve from that loan.
A loan can be very helpful for a person to meet emergencies but you should know how to manage them properly because you can get into trouble if you do not repay on time.
So if you think you need a loan, you can go through these various points before taking a loan, and you can avoid from being getting into any trouble.