Be A Smart Borrower In 2018

With the rising cost of education, healthcare and lifestyle expenses, borrowing to meet one’s needs and financial goals has become a regular part of urban life. Whether it’s to buy a house, a car or to fund children’s higher education or to meet any financial emergency, millions of people apply for loans every month in India. Now taking a loan is an important financial decision as it impacts your future, so one should be careful about certain aspects of it. Here are some tips to ensure you make an informed and smart decision with your loan:

Know your credit score, always: Your credit score represents your creditworthiness. Simply put, the 3-digit credit score tells lenders how you have behaved on past credit and how likely you are to behave responsibly while repaying the applied loan. Finding out your score today is extremely easy and free. By being aware of your score, you can apply for a loan with the right lender and get the right price on the loan. In case you find your score low, you can wait and improve it before applying for a loan.

Compare before you buy: Never make a borrowing decision in the spur of a moment. Always, spend some time in comparing various credit options and products available to you online, before making a final decision. For meeting financial goals such as buying a home or meeting emergency cash needs, visit an online marketplace. They offer you a wide choice of lending products along with the ease of comparison and customised solutions, according to your profile and needs.

Borrow only what you need: With lending process getting more user-friendly and several attractive offers and easy repayment options available, borrowers often borrow more than they need. It is imperative to keep in mind that all loans come with an interest component, and the more you borrow, the more you have to repay later through higher EMIs or longer loan tenure. This may become a burden at a later stage.

Look out for tax exemptions: Lending products such as education and home loans qualify for income tax benefits for borrowers. While for home loans, both the principal as well as the interest paid are eligible for tax deductions, in case of education loans, only the interest paid is eligible. Also, one should check for eligibility for subsidy under the affordable housing scheme by the government.

Clear your debts before investing: This is a common dilemma people face — whether to invest or use the money to pay off debts. The easiest way to decide is to calculate the interest you are paying on your debt and the expected rate of returns on your investment. In case, you can earn a higher after-tax return on your investments than the interest rate expense on your debt, you should invest. For example, if you are repaying your home loan at an 8.3 per cent and your investment in equity is likely to earn you 12 per cent returns, you should continue with your home loan and invest your surplus. However, for costlier lending options such as credit cards and personal loans, you should definitely repay your debt before investing.

Be responsible with the loan: Once you have taken any kind of lending product, ensure that you repay with discipline. Missing an EMI or not paying your credit card outstanding amount in full should be completely avoided. Once you miss a payment, your credit score plummets and does serious damage to your chances of getting a loan in the future. In case you face problems repaying, consider options such as converting your credit card dues into EMIs, and curbing future expenses.

While these tips should help you, I would urge anyone taking a loan to plan it well in advance, and do solid research before making a final decision.

Naveen Kukreja

Guest Author Naveen Kukreja is CEO and co-founder of Paisabazaar.com. He studied engineering at Delhi College of Engineering and holds a postgraduate diploma from IIM Calcutta