It will be good and brings in lots of happiness while taking loan as you will be getting into your new home, new bike, car, pay off your credit card bills, buy household products etc.
Depending on the size of the loan you will rue yourself as you might struggle to pay EMIs. At times the interest portion may look so high that you might think it as wrong decision as well.
Loans are available in plenty, and they started processing loans based on your credit cards usage, social media usages etc.
Recently one of my known relatives completed his college studies and got a job in IT company. He is in training and started getting his salary as well. He got a loan from unauthorized mobile apps and he got into a web of loans where he was forced to pay 50,000. Further, many regulations came in recently to shut off these unauthorized lending.
Getting a loan and paying off is a skill, don’t get trapped into it and lose your life.
How much loan is good enough?
Getting up to 40% of your salary or income is good enough.
50% of your income might stretch you to the great extent at times when there is a medical issue or payments needed for school or college fees etc.
Once you set yourself a limit of 40% of your income, then remaining can be used to plan for your monthly needs and the left over can be used for investing for your important financial goals.
Generally, home loans are provided up to 50% of your monthly income. Car and Personal loans are provided based on your income and loan paying capacity. Business loans are provided based on collaterals and special cases.
7 Mistakes to avoid while taking loan
You will be treated like a king or queen while taking a loan and you will be treated with lots of fees and charges when you miss the repayment of your loans.
Let us look at the 7 mistakes most of them make.
- Home loans above means
- Top up Loan on Home loan
- Buying 2nd Home on Loan
- Buying jewels on Credit card
- Credit card Interest
- Checking Home loan interest rate
- Buying loans from Unauthorized mobile apps
Home loans above Means
Owning home is an emotional reason but getting into vicious circle of paying EMIs is the biggest mistake most of them make.
One of the recent clients working in a reputed firm and earning more than 70,000 per month. He took home loan close to 50% of his income and in the next few months, he realized that he is paying double than the loan amount. He took a drastic step of finding ways to make money and ended up in MLM scam. It had costed him few more loans in the name of Personal Loan and Credit card loan.
During Covid his salary was reduced by 25%. Further, this has created huge stress on his day-to-day life.
In my view, it is big home loan which he had taken without considering about their family or office situation.
Any loans you are availing should be within your means to pay off as well as to lead a smooth life.
Top Up on Home Loans
If you are repaying consistently or paying off any portion in advance means, the loan company will provide the option of top up on your existing loan. They don’t want you to be debt free as you are a good customer in repaying.
Top up loan may look like last resort if you are having huge loans and if you couldn’t find any way in the short term.
Think as many times as possible before opting for this top up loan and later make a plan to close it off at the earliest.
Buying 2nd Home on Loan
If you don’t have any debts and increase in income, then the focus would turn towards owning 2nd property for rental income. Rental income across India has been less than 3-4%.
You have to pay a huge interest amount on your loan after which you will own your property.
Think! If this is a good investment idea.
If you put the investment in fractional commercial real estate investment, you will get 8% and more along with invested amount & rental appreciation.
One of my clients has been paying EMI for the last 4 years on his 2nd home and he is not getting expected rental income.
Buying Jewels on Credit Card
For many Indians, Gold is one of the best investment tools as it could help during tough times. I heard few of my friends who shared that they would pay Jewelry or gold coins using credit card and they will pay of this credit card in EMIs.
Gold yields less than 8-9% in the long term and in the last 10 years, it has given only less than 6%. Credit card interest is more than 40% annually in most of the companies.
Credit Card Interest Rates
You may be surprised to see this point but many of them are not aware of the interest rate on credit card.
Interest rates vary from 36% to 48% annually which is highest among any other loan products.
Credit card is a virtual money which is offered to you, if you fail to pay the due amount on time, then they will start making money from you in the form of interests, fees, charges etc.
Checking Home Loan Interest Rates
It’s a blunt mistake on the side of the customer. If you are someone who keeps paying home loan EMI for years together then this point is for you, some of the banks will not reduce the interest rates unless asked by the customer.
Most of the nationalized banks reduce or increase interest rates based on rates offered by RBI.
One of my friends didn’t check his interest rate and while filing income tax he had shared about the higher interest rates. Further to our discussion, I advised him to raise a query with Bank manager to reduce the interest rate. As he was paying almost 3% higher than the average interest rates of other banks.
Buying Loans from Unauthorized mobile apps
Covid pushed many people to borrow money from unauthorized mobile apps.
Highest interest rates were charged on their small loans and customers couldn’t come out of this vicious circle of paying EMI.
These apps started thriving as the small loans will not be handled by Banks or NBFCs.
Due to these unauthorized mobile apps many people committed suicides across India. Further, the Union Government had passed an order to remove the mobile apps which are functioning without RBI approval.
3 Points to consider before taking Loans
- Your Total Loan Value should be less than 40% of your income
- Know how much you are paying as Interest on the principal
- Have a plan to close down all the loans
About the Author
Ganesan Thiru is an Author, Stock Market Profit coach, Research Analyst who has trained more than 10,000+ people in stock market investments & had done 90+ webinars in the last 15+ months He has 1800+ people in his Private Facebook group “Unlimited Wealth” & active in social media. His mission is to inspire one million people in getting financial freedom.