Nowadays availing of a loan could be very simple and the best option to meet your needs. But are we take the loan for the right purpose? This is the right time to ask this question. The interest rates on most floating rate loans, be it home, car or personal, are up by almost 3-4%. On the other hand, cost of living has gone up thanks to rise in inflation.
And a big question mark on the job front and income stability, it is better you avoid getting into a financial mess. Taking a loan is not a bad proposition. But it should be for the right reason.
Housing loans are considered good loan as you are investing in an asset. Basically, the value of the property will appreciate so that you can earn better returns in future. Now you can wait and watch before you take a home loan given that property may witness further correction.
However one needs to also keep in mind , if the property prices fall then one may incur a loss as well the bank may ask for additional documents or security against the loan.For example if you have invested in a house of Rs 50 lakh and the loan amount is Rs 42 lakh. If the property prices fall below Rs 42 lakh, the bank can ask for some additional security or ask you to pay the difference. If you cannot do so, the bank will classify you as a defaulter.Consequently, the bank can take possession of the house or flat. If you paying a high amount of rent, it may make financial sense to buy a house. So, you can wait for 6 months to a year to see the direction of real estate prices before you take a decision.
For the latest car
If you are a business person, it will make sense because you get depreciation as well as interest deduction benefits; so your overall cost of the loan gets subsidised because of these benefits. But if you are a salaried person, you should evaluate the actual cost of the loan.
Dealers and banks give you upfront cash discounts or a reduction in EMIs. In the current situation, it is better to avoid a car loan as the value of car depreciates faster than the principal repayment.If you still want to buy a car,you must ensure that atleast you are able to fund more than 50% of the car value through your savings.
For a consumer durable product
Buying your washing machine or an LCD television on an EMI scheme has become very common. But once you sign up for such a scheme, chances are you get into an EMI mode or a perennial consumption mode. The processing fee, in a way, is an interest payment which can be as high as 20% on such schemes. It is better you save for over 6 months and fund these durables yourself. Often, the consumer durable stores advertise zero interest rate schemes to woo potential buyers. Then they charge a processing fee, which is actually the interest that you end up paying in advance. So, ensure there are no processing charges — only then is it a true interest-free loan.
For higher education
Higher education can be classified as a good loan as it enhances or builds your career, which is also an asset.
An asset can be defined as anything that can possibly put more money in your pocket and education helps you do that. So, a loan to enhance your skill sets or to make you more literate is always a good loan. But that does not mean just adding degrees for the sake of adding but actually using it.
Always ensure that your EMIs are below 30% for all loans other than home loans. The more you get into debt the lesser control you have over your money and your future. If you are a young borrower it particularly pinches as you may lose out on some hefty long-term rewards because of compounding effect.
As of now, home loans or education loans which help build assets or skill sets are more advisable.Any other consumption loan is better avoided. Better be safe than worry!Lead a hassle free life!!