Nowadays, getting a loan has become quite easy, with banks practically throwing themselves at you to avail of a loan; whether a personal loan or home loan, to buy a 2/4-wheeler, or even to cover your wedding expenses… 🙂
However, as rightly said, the devil is always in the detail and there are facts you need to be aware of before actually signing on the dotted line.
- Down Payment – Banks normally finance anywhere from 75-90% of the loan amount. The balance has to be put in by you, so it is important you know this first up and whether you can afford this. NEVER take a personal loan to finance the down payment for a larger loan.
- Interest Rate – Computation of interest rate may varies across lenders so it is important that you understand this clearly, firstly whether it is a fixed or a floating rate loan, and secondly, the kind of reducing balance method applied – daily, monthly, quarterly or annual. The shorter the better, as the principal reduces quicker, leading to increase in your savings. Remember to also factor in the total interest outgo you will pay over the loan tenure. This may cause you to rethink on some aspects of the loan.
- EMI Amount and Date – Depending on your monthly take home, your EMI is typically capped at 40-45% of this amount, subject to your other regular expenses, utility bills and any other loan payments. All this information can be gleaned from your bank statements so bear this in mind when agreeing to an EMI figure. Secondly, dates for payment of the EMI are typically 01st, 07th, 10th, 15th or 25th. These are the most common ones, and once fixed, cannot be changed, so it is important that you think this through carefully, depending on when your salary is credited, as well as when your other bill payments are scheduled. It is a good idea to stagger payments across the entire month so you don’t suddenly fall short of cash when you need it most.
- Admin / Other Charges – Often buried in the small print, these are admin / processing fees charged by lenders and usually between 1-2% of the loan amount.
- Pre-payment penalty – Some lenders levy a part / full pre-payment penalty and some don’t allow part pre-payment at all. Depending on the nature of the loan, this is typically 0.25-2% of the outstanding principal amount at that time.
- Tax Breaks – So far, tax breaks are offered only on education and home loans, and the latter is quite a useful option to exercise as both the interest and principal repayment qualify for tax rebates.
Remember, loans are not bad per se, it’s how you avail of them and then utilise them that determines whether they turn out to be a boon or a bane ! 😀