Does the loan have any benefits? When is the right time to take a loan?
A loan is a type of financial help that is given by a bank, institution, friend, or relative in exchange for some guarantee. A guarantee is a security given to the bank on which a loan amount is given. The security is used for repayment of the loan seeker who fails to repay the debt or does some sort of dispute.
As of current times, the process of loan application has become a lot easier than earlier. Nowadays, you just need a good CIBIL score to get approved for a loan. If you have a good CIBIL score, boom you have been approved for a loan at a good percent. Otherwise, you will have to improve your CIBIL score.
CIBIL score can be increased by clearing outstanding dues, or by taking a small loan which boosts up your CIBIL score. CIBIL score is also affected by Credit cards as it is also a kind of loan.
Loans have many disadvantages but, it is good if used in a proper manner. Certain advantages of loans are listed below.
Benefits of a Loan –
1. Flexibility – In a loan, the banks allow you to pay as per your convenience. This could be on the amount you want to pay every month as well as for how many months/ years you want to continue the loan. This gives an advantage as the seeker can adjust according to his needs.
2. Interest Rates – Well, when it comes to interest percent on loans, banks have certain benefits. One of which is you get a lower interest % if you are from SC/ ST/ OBC or belong to some reserved category. There are also advantages for people with special needs and disabilities.
3. Tax Benefit – Both interests paid as well as the principal amount of loan is eligible for tax deductions. The maximum deduction allowed for deductions under section 80C is 150K INR.
So, loans do have some benefits, and one of the important benefits of a loan is, it can be used anytime. We can apply for a loan anytime we want. This is our guardian angel. But, remember this guardian angel may become the villain of your story if not used properly.
Okay, so now we are on the second most important section. When is it right to take a loan? Have you ever thought of let’s wait for a few more months before taking a loan or have considered factor-like is my earning source stable, how much should I borrow, etc?
If you have, then it’s good. And if not, then you should consider. Otherwise, we are here to share some tips or you can say the golden rules.
When to take a loan?
- You want to increase your CIBIL score.
- You have too many pending dues/ payments.
- Previous interests are getting worse.
- You are in Urgent Need.
These are some important times when you should take a loan.
Tips on taking & repayment of Loan –
1. Take a loan of the amount which you can repay – Consider it as a rule or general thinking, but don’t go beyond your limits. It’s good to be in a range where you can easily pay the amount back. According to an expert, the EMI’s of all of your loans should not exceed more than 50% of your monthly income.
So, here’s a formula – (Loan A EMI + Loan B EMI + ...) <= (Monthly Income * 50)/100
2. Go for Short Period – As you may have heard, the tenure of each loan lasts for as long as 30 years. But is it a good choice to go for that long time? The answer is no. You should go for a short tenure. But, make sure that you still follow the first rule.
This is because when you apply for a long tenure, the EMI’s get smaller, and time increases which eventually increases the interest on the principal amount. For example, on 9.5% interest, the interest paid in 10 years on borrowed amount is approximately 57% whereas in 20 years it would jump from 57% to 128%. Now you can see why is it preferred to keep it short.
3. No dispute – After taking a loan, make sure to repay your EMI’s. Any delay in repayment could affect your future loan borrowing as well as this would put stress on your monthly budget as the EMI would be included in next month with extra interest.
4. Interest Percent – Do you remember the old movies where a landlord used to give credit to people on the high-interest rate that goes up to 35%+. Don’t fall for such tricks. Nowadays there is a common scam going on where a loan is given on less % than the banks but, just a shift is made on tenure. They go like this loan at 9% per month. And we see a less percent and take a loan whereas there was a month written which makes us pay more than a regular bank would.
5. Go through loan documents carefully – Loan documents are very lengthy and this can become a setback for you or give you unnecessary surprises. Go through the document carefully along with reading paragraphs in small font size. Some lenders are notorious and add some conditions which eventually profit them every month. If you do not understand ask for a financial advisor or CA, this would help you understand the terms and conditions better.
So before taking a loan make sure you have a stable job. This would not burden you on repayment. Also, make sure you consult this loan situation with your family as they can be in a constant loop if something goes wrong.
Loans are for helping purposes but they become ugly when there are some dues left. So, make sure you clear each penny of your loan. There are many cases where a single Rupee leads to an outstanding balance of thousands of rupees.
An important thing that you will need after paying off your debt is NOC (No objection certificate) make sure to take that from your lender as this is your only proof that you have cleared all of your outstanding dues.
Last but not the least, avoid taking loans at a higher interest rate.