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Tengoldenrulestofollowwhentakingaloan
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ByNehaPandeyDeoras,ETBureau|14Sep,2015,10.44AMIST

Inanidealworld,everybodywouldhaveenoughmoneyforallhisneeds.Inreality,manyof
ushavelittleoptionbuttoborrowtomeetourgoals,bothrealandimagined.Forbanksand
NBFCs,theyawninggapbetweenrealityandaspirationsisatremendousopportunity.They
arecarpetbombingpotentialcustomerswithloanoffersthroughemails,SMSsandphone
calls.Somepromiselowrates,othersofferquickdisbursalsandeasyprocesses.

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Technologyhaschangedseveralthingsforthelendingindustry.Onlineaggregatorshelpcustomerszeroinonthecheapestloanand
bankstakelessthanaminutetoapproveanddisburseloans.ThepersonalloanfacilityfromHDFCBankistheUsainBoltofthefinancial
world.Ittakesjust10secondstodisbursealoantoitsNetbankingcustomers."It'sagamechangerfortheindustry,"claimsabank
official.

Whiletechnologyhasalteredthewayloansarebeingdisbursed,thecanonsofprudentborrowingremainunchanged.Itstilldoesn'tmake
sensetoborrowifyoudon'tneedthemoney.Ortakealongtermloanonlytoenjoythetaxbenefitsavailableontheinterestyoupay.Our
coverstorythisweeklistsout10suchimmutablerulesofborrowingthatpotentialcustomersmustkeepinmind.Followthemandyouwill
neverfindyourselfenslavedbydebt.

1.DON'TBORROWMORETHANYOUCANREPAY
Thefirstruleofsmartborrowingiswhattheoldergenerationhasbeentellingusallthetime:don'tlivebeyondyourmeans.Takealoan

thatyoucaneasilyrepay.OnethumbrulesaysthatcarEMIsshouldnotexceed15%whilepersonalloanEMIsshouldnotaccountfor
morethan10%ofthenetmonthlyincome."Yourmonthlyoutgotowardsallyourloansputtogethershouldnotbemorethan50%ofyour
monthlyincome,"saysRishiMehra,founder,Deal4Loans.com.
Canonlineloanportalsofferyouabetterdeal?
Withbanksfallingovereachothertoattractbusiness,takingaloanappearsaseasyasABC.Butdon'ttakealoanjustbecauseitis
available.Makesurethatyourloantoincomeratioiswithinacceptablelimits.HyderabadbasedPhaniKumarhasbeenrepayingloans
rightfromthetimehestartedworking.

ItstartedwithtwopersonalloansofRs5lakhsixyearsago.Atthattime,hewaspayinganEMIofRs18,000(or40%ofhistakehome).
Despitestretchedfinances,KumartookacarloanofRs5.74lakhin2012,addinganotherRs12,500tohismonthlyoutgo.Lastyear,he
tookathirdpersonalloanofRs8lakhtoretiretheotherloansandanothertopuploanofRs4lakhtomeetotherexpenses.Today,he
paysanEMIofRs49,900,whichisalmost72%ofhisnettakehomepay.
IfyourEMIsgobbleuptoomuchofyourincome,othercriticalfinancialgoals,likesavingforretirementoryourkids'education,mightget
impacted.Retirementplanningisoftenthefirsttobesacrificedinsuchsituations.Evenaftersixyearsofworking,Kumar'snetworthisin
thenegative.Makesureyoudon'tcommitthismistake.
2.KEEPTENUREASSHORTASPOSSIBLE
Themaximumhomeloantenureofferedbyallmajorlendersis30years.Thelongerthetenure,theloweristheEMI,whichmakesitvery
temptingtogofora2530yearloan.However,itisbesttotakealoanfortheshortesttenureyoucanafford.Inalongtermloan,the
interestoutgoistoohigh.Ina10yearloan,theinterestpaidis57%oftheborrowedamount.Thisshootsupto128%ifthetenureis20
years.
IfyoutakeaRs50lakhloanfor25years,youwillpayRs83.5lakh(or167%)ininterestalone."Takingaloanisnegativecompounding.

Thelongerthetenure,thehigheristhecompoundinterestthatthebankearnsfromyou,"warnsfinancialtrainerP.V.Subramanyam.

Sometimes,itmaybenecessarytogoforalongertenure.Ayoungpersonwithalowincomewon'tbeabletoborrowenoughifthetenure
is10years.HewillhavetoincreasethetenuresothattheEMIfitshispocket.Forsuchborrowers,thebestoptionistoincreasetheEMI
amounteveryyearinlinewithanincreaseintheincome.
IncreasingtheEMIamountcanhaveadramaticimpactontheloantenure.Assumingthattheborrower'sincomewillrise810%every
year,increasingtheEMIinthesameproportionshouldnotbeverydifficult.IfapersontakesaloanofRs50lakhat10%for20years,his
EMIwillbeRs48,251.IfheincreasestheEMIeveryyearby5%,theloangetspaidoffinlessthan12years.Ifhetightensthebeltand
increasestheEMIby10%everyyear,hewouldpayofftheloaninjustnineyearsandthreemonths.
3.ENSURETIMELYANDREGULARREPAYMENT
Itpaystobedisciplined,especiallywhenitcomestorepaymentofdues.Whetheritisashorttermdebtlikeacreditcardbilloralong
termloanforyourhouse,makesureyoudon'tmissthepayment.MissinganEMIordelayingapaymentareamongthekeyfactorsthat
canimpactyourcreditprofileandhinderyourchancesoftakingaloanforotherneedslaterinlife.
NevermissaloanEMI,evenifitmeansmissingotherinvestmentsforthetime.Inanemergency,prioritiseyourdues.Youmusttakecare
nevertomissyourcreditcardpaymentsbecauseyouwillnotonlybeslappedwithanonpaymentpenaltybutalsobechargedahefty
interestontheunpaidamount.

Ifyoudon'thavethemoneytopaytheentirecreditcardbill,paytheminimum5%androlloverthebalance.Butdon'tmakeahabitofthis
becauseataninterestrateof2436%,creditcarddebtisthecostliestloanyouwillevertake.Toavoidmissingtheduedateeverymonth,
justgivestandinginstructionstoyourbanktopaytheminimum5%amountwheneverthebillisdue.
4.DON'TBORROWTOSPLURGEORINVEST
Thisisalsooneofthebasicrulesofinvesting.Neveruseborrowedmoneytoinvest.Ultrasafeinvestmentslikefixeddepositsandbonds
won'tbeabletomatchtherateofinterestyoupayontheloan.Andinvestmentsthatofferhigherreturns,suchasequities,aretoovolatile.
Ifthemarketsdecline,youwillnotonlysufferlossesbutwillbestrappedwithanEMIaswell.
Therewasatimewhenrealestatewasaverycosteffectiveinvestment.Housingloanswereavailablefor78%andrealestateprices
wererising1520%.Soitmadealotofsensetobuyapropertywithacheaploan.Nowthetableshaveturned.Homeloansnowcost

around10%whilepropertypricesarerisingbybarely45%.Insomepocketstheyhaveevendeclinedinthepast12years.

Similarly,avoidtakingaloanfordiscretionaryspending.YoumaybegettingSMSsfromyourcreditcardcompanyforatravelloan,but
suchwantsarebetterfulfilledbysavingup."It'snotagoodideatotakeapersonalloanforbuyingluxurywatchesandhighendbags,"
saysVineetJain,founderofLoanStreet.in.Ifyoumustgoonaholiday,throwalavishpartyorindulgeinsomeluxuryshopping,start
savingnow.
Ontheotherhand,takingaloanforbuildinganassetmakeseminentsense.MumbaibasedSandeepYadavandhiswifejunkedtheir
planstogoonaforeignholidayandinsteadusedthemoneyforthedownpaymentoftheirhouse.Thiswaytheymanagedtobringdown
theoverallloanrequirementforthehouse.
5.TAKEINSURANCEWITHBIGTICKETLOANS
Ifyoutakealargehomeorcarloan,itisbesttotakeinsurancecoveraswell.Buyatermplanofthesameamounttoensurethatyour
familyisnotsaddledwithunaffordabledebtifsomethinghappenstoyou.Thelenderwilltakeovertheasset(houseorcar)ifyour
dependentsareunabletopaytheEMI.AterminsuranceplanofRs50lakhwillnotcostyoutoomuch.
Typically,bankspushareducingcovertermplanthatoffersinsuranceequaltotheoutstandingamount.However,aregulartermplanisa
betterwaytocoverthisliability.Itcancontinueevenaftertheloanisrepaidorifyouswitchtoanotherlender.

Moreover,insurancepoliciesthatarelinkedtoaloanareoftensinglepremiumplans.Thesearenotascosteffectiveasregularpayment
plans.Ifalenderforcesyoutobuyaninsuranceplanthatislinkedtotheloan,takeupthematterwiththebankingombudsmenandthe
insuranceregulator.
6.KEEPSHOPPINGFORBETTERRATES
Alongtermmortgageshouldneverbeasignandforgetexercise.Keepyoureyesandearsopenaboutthenewrulesandchangesin
interestrates.TheRBIisplanningtochangethebaserateformula,whichcouldchangethewayyourbankcalibratesitslendingrates.
Keepshoppingaroundforthebestrateandswitchtoacheaperloanifpossible.
However,thedifferenceshouldbeatleast2percentagepoints,otherwisetheprepaymentpenaltyontheoldloanandprocessingcharges
ofthenewloanwilleatintothegainsfromtheswitch.

Also,switchingwillbemorebeneficialifdoneearlyintheloantenure.Supposeyouhavealoanat11.75%andarebeingofferedanew
rateof9.9%.Youcansaveupto52EMIsiftheloanstillhas18yearstogo.Butiftheloanonlyhasfivemoreyearstogo,thenewloan
tenurewillbeonlythreeEMIsshorter.Thesameappliestoprepaymentofloans.
Theearlieryoudoit,thebiggeristheimpactontheloantenure.TheRBIdoesnotallowbankstolevyaprepaymentpenaltyonhousing
loansbuttheymaylevyapenaltyonotherloans.Somelendersdonotchargeaprepaymentpenaltyiftheamountpaiddoesnotexceed
25%oftheoutstandingamountatthebeginningoftheyear.
7.UNDERSTANDTHEFINEPRINT
Loandocumentsdon'tmakeforlightreading.Paragraphafterparagraphoflegaleseprintedinasmallfontcanbeaputoff.Yet,readthe
termsandconditionscarefullytoavoidunpleasantsurprises.BengalurubasedSubhashShettyappliedforapersonalloanofRs1lakh
butreceivedachequeofonlyRs91,800.ThelenderhaddeductedRs5,152asanupfrontinterestchargeandanannualinsurance
premiumofRs3,047.

Shettyhadsignedonthepaperswithoutgoingintothefineprint.Somelendersarenotoriousforslippinginclausesthatareloaded
againsttheborrower.Ifyouareunabletounderstandthelegalese,getafinancialadvisororcharteredaccountanttotakealookatthe
agreementbeforeyousignit.
8.SUBSTITUTEHIGHCOSTLOANS
Ifyouhavetoomanyloansrunning,it'sagoodideatoconsolidateyourdebtsunderoneomnibuslowcostloan.Makealistofall
outstandingloansandidentifythehighcostonesthatcanbereplacedwithcheaperloans(seetable).Forinstance,anunsecured
personalloanthatcharges1820%canbereplacedwithaloanagainstlifeinsurancepolicies.
Aloanagainstpropertycanbeusedtorepayallotheroutstandingloans.Youcouldalsoconsiderotheroptionslikegoldloansandloan
againstbankdeposits.Itisalsoagoodideatoprepaycostlyloansassoonaspossible.Divertwindfallgains,suchasannualperformance
bonus,taxrefundsandmaturityproceedsfromlifeinsurancepoliciestowardsrepaymentofthesehighcostloans.

Borrowerssometimesavoidendingloansbecausetheyoffertaxbenefits.Ifahouseisselfoccupied,uptoRs2lakhinterestpaidona
homeloancanbeclaimedasataxdeduction.Ifthehouseisgivenoutonrent,theentireinterestpaidcanbeclaimedasdeduction.In
caseofeducationloans,theentireinterestpaidontheloanistaxdeductibleforuptoeightyears.
Butthistaxbenefitaloneshouldnotbethereasontokeepaloanrunning.True,thetaxbenefitsbringdowntheeffectivecostoftheloan.

Butyouarestillincurringanexpensethatcanbeavoidedbyendingtheloanassoonaspossible.Unlessthemoneycanearnyoua
betterreturnthantheeffectivecostoftheloan,useittoprepaytheoutstandingsum.
9.DON'TNIXRETIREMENTBYAVOIDINGLOANS
Indiansareemotionalaboutcertainfinancialgoals,especiallywhentheserelatetochildren.Givenachoice,noparentwouldwantto
burdentheirchildrenwithaloan,especiallyforthepurposeofeducation.Whilesecuringyourchild'sfutureisimportant,youneedtoalso
assessifitimpactsyourownfuture.

Dippingintoyourretirementcorpustofundyourchild'seducationcanbeariskyproposition.Studentshaveoptionslikeloansand
scholarshipstocovertheireducationcostsbutthereisnosucharrangementtohelpyouplanforyourretirementneeds.Yourretirementis
asimportantasyourchild'seducation,perhapsevenmore.Donotplanforyourchildreninisolation.Letallyourgoalsbeapartofyour
expenseplanning,itwillhelpyoubalancebetter.
10.KEEPSPOUSE,FAMILYINLOOPABOUTLOAN
Beforeyoutakealoan,discussitwithyourfamily.Thisisimportantbecausetherepaymentwillimpacttheoverallfinancesoftheentire
household.Makesureyourspouseisawareoftheloanandthereasonsfortakingit.

Keepingaspouseinthedarkonmoneymattersnotonlyincreasesstressinamarriagebutalsoprecludesyourchancesoffindingamore
costeffectivesolution.Maybeyourwife(orhusband)hassomesparemoneywhichcanhelpyouavoidtakingtheloanaltogether.Don't
missoutonthatopportunitybykeepingyourneedunderwraps.

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