Even though a loan can save you from an immediate financial crisis, if handled carelessly, it can also turn out to be a money pit.
A common mistake that borrowers make is availing a loan without getting into the intricacies of the agreement. Certainly, awareness is crucial and in this post, we are trying to spread awareness.
Here’s a list of four important things that you must keep in mind while taking a loan. These tips will save you from heavy debt and over-expensive loans.
1. Avoid Loans For Expensive Stuff That You Don’t Need
As adults, we can understand the difference between “needs” and “desires.”
While needs refer to the essentials that are required for survival and basic living, desires include luxurious items that we don’t necessarily need, but wish to buy.
And undoubtedly, there’s nothing wrong with buying expensive items out of desire. However, taking a loan for an overly-expensive item that you don’t need won’t be a good idea.
The golden rule of thumb, in this case, is to avoid buying items that we can’t afford at twice their original price. Also, it’s smart to ensure that your total monthly EMIs don’t exceed 50% of your monthly income.
2. Shorter The Tenure, Smarter The Investment
Whether you are seeking a loan for buying a car, or for other personal reasons, keeping the loan tenure short is a smart way of saving money. Car loan brokers can help you through this process by providing flexibility in beating long loan tenures and helping you save money.
It’s a fact – most loans that are sanctioned for long periods of time have higher interest rates. And on a good day, even if you manage to find a lender offering a long term loan for lower interest rates, the final payable amount will still exceed what you’d repay for a short term loan.
This happens as the lower interest rate when added up over years increases, pushing up the final amount.
This is one great benefit of payday loans. These are generally availed for short term and smaller amounts. Just make sure that you are taking the payday loan only from a friendly payday loan service.
3. Know Your Repayment Capabilities
The amount of money that you are going to pay every month should be in your comfort zone. Even though it’s advisable to keep the tenure short, it’s crucial to choose an EMI option that you can repay each month, right on time.
Missing the EMI dates is an ill-practice that can land you with hefty fines. Yes, that’s another route to lose money. So, keep yourself safe and pick an EMI plan that you are comfortable with.
4. Borrowing For Mutual Funds? Not a Good Idea
Another big mistake while availing loans is to take credit for your investments.
While a business loan may make sense in this case, a loan for investing money in mutual funds or other deposit accounts won’t be a good idea.
Top reason?
Well, the interest that you get through these safe investments is not going to give you more money than what you’ll have to pay back. In fact, the money that you get may not even be equal to the amount that you are going to pay.
So, what’s the point? If you want to make mutual fund investments, it’d be best to use the money that is yours.
Wrapping Up
Taking loans can often be a tricky bet. And the worst happens when we are in a rush. There’s a number of things that must be kept in mind and must be avoided while taking a new loan.
In this article, we discussed four such things to remember while taking a loan.
Hopefully, this was helpful.
