3 reasons why loans are not such a bad thing
You may have noticed that every time you throw up an idea of taking up a loan, someone in the family frowns. They will advise you against it. In a typical Indian household, the tendency is to keep loans to a minimum. Needless to say, personal loan account for only one-fifth of the overall bank credit in India.
Here are 3 reasons why borrowing is not such a bad thing:
- Steady income
In India, there is a social stigma attached to taking a loan. However, if you are earning a steady income and are confident about yourself, there is no need to worry. You can always use borrowing to your advantage. You need to build a track record of paying back your loans on time. Lenders are happy to service such borrowers. From your standpoint, you are eligible for loans, the equated monthly installment for which equals to about 40% of your net take home income. As your income grows, it is important to ensure that you never cross that limit as a thumb rule. That way, you can manage your borrowing according to your rising needs.
- Borrowing when you do not need
If you borrow during an emergency, terms of such a loan do not favour you. They favour the lender. If you speak to someone who knows about finance, he or she will tell you that borrowing when you are not in a tearing hurry works well. For example, you may want to go for renovating your home. You could plan your loan in advance if you show to the lender that you have a steady income. You can negotiate terms with multiple lenders and take the best possible offer.
- Loans that go a long way
Lets assume you received a bonus from your company. When you receive a lump sum amount, your first instinct is to set aside some money to partially pay back your loans. Many people tend to cut down on their home loan liability every time they receive a lump sum. But are you aware your home loan is the cheapest long-term loan you can get as an individual? If you account for tax benefits like the principal repayment and interest paid, the actual interest rate is a couple of percentage points lower.
Paying back home loan is not such a great idea if you are confident about yourself and your steady rising income each year. You can actually utilize the excess money to create new assets or set it aside for realizing another dream. Effectively, you are utilizing your cash for expenditure or new investing. Your borrowing rate stays at your home loan, rate manageable over the years as your income grows.