Loans and Healthy Borrowing Habits

The World Bank has pegged this year’s growth rate for India at 7.3%, up from 6.7% in 2017. It also says that rise in private investments and public consumption had played a big part in this as India recovers from the effects of demonetization and the Goods and Services Tax. This resulted in Indians taking more loans to buy things that they desire. Credits have become an integral part of everyone’s life in today’s world. But are they cultivating healthy borrowing habits?

Like any habit, our borrowing habits must be smart and healthy, if we hope to have a good financial life. Not only would it save us from a lot of trouble, it would also ensure that we get the most out of our loans and credits.

Let’s know more about loans and how to maintain healthy borrowing habits. But first let’s take a look at the type of loans that can be borrowed in India.

Types of Loans

1. Credit Cards: Perhaps the most popular option, credit cards allow you to draw a sum, greater than you possess and repay it later with interest. It is convenient because you can use the amount whenever you need it, without any application.

2. Mortgages: Mortgages are secured loans that uses your assets as collateral, usually your house, or other valuable assets attached as security for the loan. Defaulting on the loan might result in seizure of your mortgage.

3. Personal Loans: Personal loans are the simplest loans that do not come with a designated purpose and can be used for whatever you deem fit. These are usually collateral free.

4. Overdrafts: Overdrafts are similar to credit cards in the sense that they allow you to withdraw more money than you have in your bank account.

5. Two-Wheeler Loans: If you are looking to buy a bike or scooter, you can take a two-wheeler loan. The terms of this loan are quite simple and your two-wheeler is hypothecated as a security with the company.

1. Car Loans: As the name signifies, car loans are loans you take for buying your car. Like mortgages, your car is the collateral and can be confiscated if you fail to repay the loan.

7. Loan Against Property: LAP is similar to personal loans in the sense that there is no designated use for the loan amount you receive. However, it is secured in nature and requires your fixed property as collateral.

Possible Uses of Loan and Credit

Money comes with different uses, and so does the loans. Here are few of the many possible uses of loans:

1. Most business owners take loans to expand their business. The objective might be to setup new factories, hire more employees or buy new equipment.

2. Acquisition of machinery is another common use of loans, usually covered under business expansion. The loans could be targeted (equipment financing) or general (business loans).

3. Debt consolidation is a very popular use of taking loans. The idea is to take a loan with low interest rate, and use the loan amount to repay multiple loans.

4. Education is another popular use for people to apply for loans. In general, student loans are the preferred option as government often provides subsidies on them.

5. The most common use of loans is to buy a new property or conveyance. The property could be a house/land (home loans), automobile (car/two-wheeler loan) or electronics.

Healthy Borrowing Habits You Should Know

So, let’s address the elephant in the room: having a healthy borrowing habit. Unlike how it sounds, it is pretty easy to have a borrowing habit that helps you in the long run. Here is what you can do:

1. Pay EMI on Time: Most people assume EMI to stand for “Easy Monthly Installments”, but that is just a marketing strategy. In truth, repaying your loan is more caution and less comfort. It is very easy to think “I pay on time every month, so delaying this time shouldn’t be a big deal”, but it is. However, delays do happen, as we are prone to making mistakes. Even if you delay a month’s EMI, ensure that you pay your EMI early for the next few months. This would make sure that your credit score is not negatively affected.

2. Avoid defaulting: This is one sin that you should never commit. For starters, it messes up your credit score and makes you look unreliable. Once you default on a loan, you give the lender the right to take legal actions to cover the debt, including confiscating the assets that you mortgaged. If you take a loan, ensure repaying it as your top priority.

3. Borrow what you can repay: Most people have a strange notion that loans allow you to buy things that you otherwise wouldn’t be able to afford. In reality, however, it is exactly the opposite. Loans are meant to buy things that you can afford, but do not have the funds right now for. A habit of borrowing money that you can’t repay would lead to delayed payments and even defaulting, which we discussed in the previous points.

4. Track your expenses: This advice is not just restricted to loan repayments, but an overall advice for healthy financial life. People often keep their expenses disorganized, which leads to failure in balancing your expenditure and savings. It also leads to being unable to have the fund for repaying the monthly EMIs, the drawbacks of which we discussed earlier.

Conclusion

There’s no easy way out of fixing bad borrowing habits. Hence it’s important to start practicing good borrowing habits right from the start. The good thing is - it’s never too late to start rectifying your habits. All you need is a little bit of caution and an organized way of managing your finances. Best of luck borrowing!