The 10 Commandments Of Responsible Loan Taking

Part 1

Securing a loan is easier than ever before. Modern technology allows you to do it in minutes. But that old adage, ‘look before you leap’ still holds true. This article lists out certain rules you must keep in mind for your own safety when applying for a loan. We’ve also provided some starting points – the blue buttons will take you directly to certain offers that may work for you. But don’t go haring off just yet. There are ten rules you need to learn before you do. (This article, though, covers five.)

1. Thou shalt not take more than thou can return.

(Don’t borrow more than you can repay.)

Banks are in constant competition with each other to attract customers. Which is why they all package their deals to sound more attractive than the rest. Irresponsible lenders will encourage you to borrow money that you may not be able to repay.

There are certain golden percentages that can help you. Typically, car EMIs should not exceed 15% of your monthly income; personal loan EMIs should not exceed more than 10% of your monthly income; and all your EMIs combined should not exceed more than 50% of your monthly income.

If you spend too much on EMIs, you won’t have enough left over for other financial necessities – saving for retirement, for instance.

2. Thou shalt keep thy loan tenure as short as possible.

(A long tenure may come back to bite you in the a**.)

Long tenure loans have lower EMIs but cost a lot more in the long run. Let’s imagine you’re applying for a home loan. The maximum tenure is 30 years. But the interest you pay on that loan is much more. So while the EMI on a 10-year loan will be higher, you’ll end up paying less interest on it than on a 30-year loan.

If you can’t afford a higher EMI right now, make sure you have the option to increase it with each passing year (assuming your income also rises).

3. Thou shalt pay thy bills on time.

(Seriously. Pay them. On time. Every time.)

Missing a loan repayment won’t just cost you in terms of penalties. It will also heavily affect your credit score, spoiling your chances of taking another loan later in life. Even if there’s an emergency, paying your loan amount comes first. That’s why it’s important to be careful that you can afford it in the first place. (See rule 1.)

4. Thou shalt not use a loan to lead thee to investment.

(Don’t borrow money in order to invest it.)

There are two simple reasons for this. Super safe investments like fixed deposits will have lower rates of interest than the interest you’re paying on the loan. Which means you’ll lose money. And (the second reason) high return investments like equities are too unstable. If the markets decline – and they always do, these days – you’ll lose all your money and be stuck with an EMI you can’t afford.

5. Thou shalt take insurance if thou took a big loan.

(Taking a big loan? Take an insurance cover as well.)

Yes, it means paying a little extra right now, but at least your family will be protected if something happens to you before the loan tenure ends. The lender isn’t going to care that you are – to put it crudely – dead. Lenders only care about getting their money back. An insurance cover with a term plan that matches the loan tenure will protect your family from having to shoulder your debts. Click here for Part 2.

- Advertisement -
Avatar photo
Charlie J. Thompson
Charlie is a financial analyst turned writer His mission to provide general knowledge about the world of finance to help people from non-financial backgrounds make informed financial decisions.

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Read More

The 10 Commandments Of Responsible Loan Taking

Part 1 Securing a loan is easier than ever before. Modern technology allows you to do it in...

6 Auto Loan Mistakes People Make – And How To Avoid Them

So you need a car. And you’re thinking of applying for a loan. You’re not the only one. 85% of new car...

Thinking Of Applying For A Home Loan? Here’s What You Should Be Doing.

1. Saving for a down payment Your down payment is a portion of the...

Recent

Understanding Loans: The Differences Everyone Should Know About

You already know that a loan is a type of debt. Anything can be a loan - a car, a book -...

The Major Types Of Credit Cards

But first, a little history. The concept of a single card that would allow people to make purchases from multiple...

6 Auto Loan Mistakes People Make – And How To Avoid Them

So you need a car. And you’re thinking of applying for a loan. You’re not the only one. 85% of new car...