Loans of every kind come with certain downside
The financial world is passing through a turbulent phase again. With uncertainty looming large, many have realised that it is time to tighten their purse-strings. However, an equally important part of your outgo management is to tread carefully while taking and servicing debt. In times of rising inflation, mismanagement of repayments could cripple your finances, thereby shrinking your spending ability.
Therefore, it is best to steer clear of unsecured loans, like credit card debt, unless you have exhausted all your options. Of course, this doesn’t imply that you should be relaxed with respect to ‘good’ loans like home loans.
Given the current high interest rate regime and the possibility of yet another policy rate hike by the RBI in the coming weeks, the pressure on equated monthly installments (EMIs) is likely to be unrelenting. Therefore, it would make sense to stay away from the following traps to prevent debt burden weighing in on your monthly budget, adding to challenges borne out of stifling inflation and a bleak global scenario.
HOME LOANS BORROWING BEYOND YOUR REPAYMENT CAPACITY
This is a common, cardinal mistake while taking a loan and applicable to both home and credit card loans.
“Many borrowers overestimate their repayment capacity while availing of home loans. They look to stretch their budget to accommodate, say a 3-BHK apartment when it permits just a 2-BHK one,” points out VN Kulkarni, chief counsellor with the Bank of India-backed Abhay Credit Counselling Centre.
Since owning a house is a cherished dream of many Indians, stretching the budget is considered acceptable. They end up seeking a loan larger than required and the realisation dawns only when the EMIs start taking their toll on their finances. Ideally, one should estimate how much servicing capability one has and take loans accordingly.
“A ball park estimate for thiswould be 40-50% of take-home salary for home EMI. Over this, they will have to make arrangements for down payment as well as stamp duty, registration, any improvements to be done in this home, etc,” Kulkarni adds. People should consider buying houses only when they can put in their portion of the money required and be able to service the EMI easily. Calculate your Loan EMI with EMI Calculator
AVAILING OF TOP-UP LOANS
Similar is the case with furniture and furnishings – a house is deemed incomplete without interior decoration. Several banks offer home loan top-up facilities and many fall for them, ignoring its implications on the outgo later. These loans are typically closer to personal loans in structure, and thus carry high interest rate.
BANKING HEAVILY ON PAY HIKES
It is also not uncommon to see loan seekers overestimating potential salary hikes and bonuses while taking a loan. Ideally, repayment capacity should be ascertained primarily on the current earnings. After all, the economic scenario may take a turn for the worse, scuttling any chances of a pay raise or even leaving you jobless. Therefore, it is wise to be conservative rather than optimistic, and factor in only the present position while evaluating your EMI servicing capability.
“One should avoid being overleveraged during the good times. Once one gets into the habit, he is not able to change during stressed times. A thumb rule is that your overall debt service ratio should not exceed 2.5 times (or 40% of your income),” adds Jayant Pai, VP, Parag Parikh Financial Advisory Services.
CREDIT CARDS PAYING MINIMUM AMOUNT DUE
Extremely handy as a spending tool, it can spell doom when used as a borrowing avenue instead. Perhaps, the biggest mistake one can make while repaying credit card dues is to simply pay the minimum amount due every month specified by the credit card issuers and banks. The tendency is to assume that the overall outstanding amount will dwindle in due course. However, the perception is completely wrong. For, the outstanding will be treated as overdue amount and hefty interest and penal charges will come into the picture, hugely inflating your original amount.
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