Taking A Loan? Know The Basics First

Home »  Magazine »  Taking A Loan? Know The Basics First
Taking A Loan? Know The Basics First
Taking A Loan? Know The Basics First
V. Swaminathan - 05 February 2022

Gen Z is being bitten by the YOLO (you only live once) bug big time. With spendings taking the front seat and savings getting ignored, resorting to loans is what many turn to when they find themselves short of funds. There’s nothing wrong with taking a loan if it’s for the right purpose. Personal, car and home loan are the most popular. Here’s what you need to keep in mind to make the most of a loan.

Constructive vs non-constructive loans: Some loans are considered to be constructive, such as home loan because they help build up an asset (house) whose price has the potential to increase over time. However, a loan to buy a car, consumer goods etc. (car loan or personal loan) is used to buy goods or assets whose value depreciates over time. The bottom line is that constructive loans help you grow your wealth while non-constructive loans fund your consumption needs.

Role of credit score: When you take a loan from any lender, it reflects on your credit profile. A credit score of 750 and above is considered credit-friendly and lenders extend loans at competitive rates to such borrowers. You can reach this score and maintain it for future use by repaying loans on time and paying the equated monthly instalments (EMIs) regularly.

Interest rate: Personal loans being assured loans carry a higher interest rate compared to secured loans such as car loans or home loans. While exploring lenders, keep an eye on the rate of interest offered. Even though lenders have a minimum rate, the rate applicable to you will depend on various factors such as your income, age, gender, loan amount, loan tenure, credit score etc. Based on the rate offered to you, check the applicable EMI before finalising the lender.

Loan eligibility: Apart from interest rate, also check the loan eligibility from the lender. The maximum amount of loan that you will be eligible to borrow depends primarily on your monthly take-home income, age and any existing loan.

Cost of loan: Before taking a loan, consider the costs involved such as processing fee, prepayment charges, legal charges and others. Generally, personal loans have a prepayment charge, while home loans don’t if the loan is fully repaid from one’s own sources.

Before going for a loan, evaluate all sources from where you can arrange funds and opt for personal loans only when hard-pressed for funds. Home loans are currently available at multi-year low interest rates and also carry tax benefits. Therefore, opting for home loan in these times when even the property prices are low could turn out to be an opportune moment to move into one’s own home.

The author is CEO, Andromeda and Apnapaisa.com

Advice Must Match Investor Profile
Advantage Equities In Tug Of War With Cryptos