When Is A Good Time To Borrow?

Interest rates have risen sharply over the last year. In theory this should have deterred borrowing. But it hasn’t. Between June 2023 and June 2022, outstanding retail loans from banks grew 21 per cent to Rs 42.6 trillion. This was a period of high inflation. The growth was faster than the 18 per cent in the preceding year. Housing loans account for nearly half of retail credit; this segment grew 15 per cent last year.

Market circumstances may shape demand, but India is hungry for credit to fulfil its aspirations. One can infer this from the demand that personal circumstances and readiness play a major role in borrowing decisions. Also consumers haven’t been slowed down by inflation. So, the right time to borrow is when you are ready to borrow and can pay back.

To give you an example, a house has a base cost of Rs 100. Other costs like registration, stamp duty, goods and services tax (GST), and costs of amenities and utilities can drive the total price up to Rs 115-120. But the bank may lend only Rs 80. The rest must come out of your savings. Judging by the sharp growth in home loans, one may assume that consumers have tremendous personal readiness.

However, in a price-sensitive market, interest rates impact how much you can borrow. For instance, let’s say you wanted a home loan for 20 years, and your loan eligibility last year was Rs 30 lakh with a rate of interest of 6.5 per cent. A year later, if your income hasn’t grown, you can afford to pay the same EMI, but not higher. But with rates at 9 per cent, you can borrow only around Rs 25 lakh, even as property prices would have gone up. So, you would’ve been priced out of options that you could have afforded a year ago.

If interest rates were falling—and they will once inflation is back under control—you would be eligible to borrow more on the same income. And while that is great, it doesn’t beat personal readiness.

Should You Bundle Loans With Insurance?

Insurance is useful. Policies cross-sold with home loans typically cover life, fire and perils. But even job loss protection plans could come in handy as they could help pay a few EMIs. Consumers need to do two things here. One: evaluate the insurance plans on their own merits and demerits. Two: ask themselves how they would protect themselves against risks, such as their untimely death. After all, if they were to pass away and their families were not able to continue the EMIs, the home would be repossessed and auctioned by the lender.

If there are significant risks, consumers can decide if they want to purchase insurance from the lender or on their own from the retail insurance market. As prices, features, benefits, and exclusions may vary, consumers should choose what’s best for them.

However, what consumers shouldn’t do is be forced to buy something they don’t need. There’s often the misconception that you must absolutely buy a loan protection plan or home insurance when you take a home loan. But this isn’t true, and the RBI also prohibits it. Some lenders may also incentivise this cross-sale by giving borrowers a discount of 5-10 basis points on the interest rate. But, finally, it’s the borrower’s call. They may choose not to buy it or could simply buy adequate term insurance from their preferred insurer to protect their families against the burden of liability arising out of uncertain risks.

Loan protection plans work differently from typical term plans. There may be a reduced sum assured tied to a reduced loan balance. If the loan is pre-closed, the policy serves no further purpose, such as providing dependents a sum assured if the borrower passes away after the loan closure. On the other hand, a term plan will remain in force for the entire period you have purchased it if you choose so.