Five golden rules you should follow while taking loan

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No matter how much much money you have, there are times when you need a loan. The loan which actually fulfils your needs a good loan one should avail, like a home loan or education loan. But, sometimes people stretch themselves beyond a limit and borrow more than what they are capable of repaying and as a result, they fall into a debt trap.

To avoid a possible debt trap, borrowers should follow some rules, that never change irrespective of interest rate. Here are five such rules that potential borrowers should follow while taking a new loan.

1. EMI of your loan should not exceed 50% of net salary: You should take a loan that can be paid easily. EMIs of an individual should not exceed 10% of his net monthly income and for car loans, this ratio should not be more than 15%. Similarly, if you are planning to take a home loan, the EMI of that loan should not be more than 40% of your monthly take-home salary. In the case of multiple loans, the total EMIs should be less than 50% of your monthly take-home pay. If you ever come across a situation like job loss or pay cut, then people having a higher EMI burden will suffer the most.

2. Keep loan tenure as short as possible: Usually, borrowers select long-term loan tenure to reduce EMI cost and to save tax. But, with longer tenure, you tend to pay a higher amount.  So it is always advisable to go for the shortest possible tenure if you can afford it. Further, in the case of home loans, which have longer tenure, the borrower should try to increase EMI every year in-line with the rise in his income so that the loan is repaid quickly.  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.

3. Ensure timely and regular repayment: The more regular and disciplined you are in repaying your EMIs, the better are your chances of not only paying  your debts in time but also earning better credit scores for future loan applications. Missing an EMI not only attracts penal charges along with added interest on the overdue amount.

4. Take insurance for big-ticket loans: When you avail of big-size loans like home loans, make sure to avail term life insurance on them. If something happens, the insurer will pay the sum assured to your nominee and they can pay back the remaining loan amount with that money.

5. Never take a loan to invest: Borrowers tend to take loans to invest in other asset classes like the stock market assuming to get better returns. The interest rate in the economy has fallen to record lows, people get tempted to borrow even if they don’t need the money. The stock market is volatile in nature and you may lose out on everything.