Points To Consider Before Taking A Loan

Majority of the population in our country falls under the lower middle to high middle income sections. To own a large asset like a vehicle and a house, we all need to be a visitor to the loan department at some point or the other. One might be an entrepreneur or small business owner and will also require a line of credit sooner or later. So it makes complete sense to be aware of the basic factors related to loan.

Types of loans

There are various types of loans which one may require:

• Business Loans are usually taken for expenditure in expansion or setting-up of a business. It can be in the form of Term Loans and will have specific conditions.

• Equipment loans & SME loans with special provisions for MSME, Farmers, Women entrepreneurs; and others. Here the loan is in the name of the business entity.

• Personal loans on the other hand are taken in individual capacity for fulfilling personal ambitions like purchases, travel and maybe emergencies.

• Apart from this, one will come across two-wheeler and four-wheeler loans with their own maturity and conditions.

• Education loan is useful for children's purposes which also gives you additional tax benefit.

• Finally the largest chunk is usually the home-loan which involves the use of Debt to Loan ratio to determine how much loan can be given to you.

 Points to consider before taking a loan

Majority of the population in our country falls under the lower middle to high middle income sections. To own a large asset like a vehicle and a house, we all need to be a visitor to the loan department at some point or the other. One might be an entrepreneur or small business owner and will also require a line of credit sooner or later. So it makes complete sense to be aware of the basic factors related to loan.

Types of loans

There are various types of loans which one may require:

• Business Loans are usually taken for expenditure in expansion or setting-up of a business. It can be in the form of Term Loans and will have specific conditions.

• Equipment loans & SME loans with special provisions for MSME, Farmers, Women entrepreneurs; and others. Here the loan is in the name of the business entity.

• Personal loans on the other hand are taken in individual capacity for fulfilling personal ambitions like purchases, travel and maybe emergencies.

• Apart from this, one will come across two-wheeler and four-wheeler loans with their own maturity and conditions.

• Education loan is useful for children's purposes which also gives you additional tax benefit.

• Finally the largest chunk is usually the home-loan which involves the use of Debt to Loan ratio to determine how much loan can be given to you.

 Points to consider before taking a loan

 

1. Choose wisely the type of interest rates - The type of interest rates - fixed or floating come with their advantages. The fixed interest rate is fixed for certain duration of the tenure of the loan and gives you the freedom to keep a fixed EMI. Floating rate has its advantages in a falling interest rate environment where the central bank, Reserve Bank of India (RBI), keeps changing the policy rates like Repo which affects the Marginal Cost of Lending Rates (MCLR).

2. Longer tenure, higher interest - This is the obvious solution but you end up paying much higher than you would if you could pay in half the time. Power of compounding works against you in this case.

3. Identify the type of loan required – For instance, if your purpose is vacation, it might be wiser to take a short term personal loan rather than run up credit card debt. Each option of loan will work properly only when used with the right tenure. If you have someone to guarantee your loan and if you have less income or bad credit, the financial institution can consider the application. Anyone from your family or in friend’s group can be a guarantor. However, he or she will be liable if you cannot pay your debt off.

4. Understand the terms and conditions - Every financial institution has different set of rules and policies regarding minimum income and credit rating. So, if nothing works with your financial institution, you can try any other financial institution for that matter if you are in immediate need of the loan amount.

5. Know about the pre-payment charges - Though prepayment charges are sometimes waived off on home loans, some loans such as personal loans carry pre-payment charges. So, it is important to weight these options first before taking a loan.

6. Explore balance transfer option - Compare the payback period and interest rate available on the alternative option that you are considering for balance transfer. If the desired alternative gives you the loan at a lesser rate of interest or results in saving money, then only consider going for it.

7. Look at your credit score - Once you have your credit report in hand, go through it in detail. There might be errors in your credit report which can be fixed easily. Find out if your report shows any loan which you have already repaid. You can take the report to the rating agency to fix the errors.

If there is unpaid debt, try to repay it as soon as possible to increase the credit rating. Once the previous debts are completely repaid, you can review your credit report and increase the score.

Loan is a necessary requirement in most of the situations. But the expense of servicing a loan and the pain of non-payments or delayed ones can be reduced by understanding your options, and how and when to use them.