The Festive Season Is Here. And You Need to Be Careful With Loans

The festive season is here. And it is the time to spend, have fun and be merry. And for that very reason loan companies are more than willing to give you loans with attractive offers like reduced processing fees, lower documentation charges, and even waiver of certain fees. 

With such loans it is only tempting to indulge in festive purchases. In fact, a phone that costs Rs 1.44 lakh may seem a lot but not when divided into 12 equated monthly installments (EMIs) of Rs 12,000 each. 

However, one should be very careful before going for festive loans. “To borrow smartly, start by setting a festive budget. If additional funds are required, consider using a credit line, which offers flexibility by allowing you to borrow only what you need and pay interest only on the used amount,” says Kunal Varma, CEO and Co-founder at Freo, a digital banking platform. 

When taking a loan, it is important to understand that you should borrow only that much you can afford to pay back comfortably. Experts say that your equated monthly installments (EMIs) should not exceed 30-40 per cent of your monthly income. So, if you are earning a Rs one lakh after taxes, your EMI outgo should be a maximum of Rs 40,000. However, you may already be having a home loan and a car loan. In that case you might not be able to take additional loans. In that case, it is best to put away a purchase if it is not really urgent. Instead, save up, plan for it and then make the purchase. 

“Before taking a loan, clients should assess their monthly installment paying capability,” says Gaurav Goel, a Sebi-registered investment advisor. 

Not being able to pay a loan on time can be very harmful to your financial health. To begin with your credit score will be affected. And not being able to pay EMIs on time will only mean that your interest payments will go up and that may eventually land you in a debt trap. 

Decode Festive Loan Offers 

“Check the effective annual rate rather than just promotional offers. Always read the fine print for any hidden charges,” says Varma.

“Check documentation requirements, hidden costs, pre-payment charges, etc,” says Goel. Look for processing charges and foreclosure charges. In essence have an idea of the EMI outgo and also the other charges involved. Look at the key fact statement for all such details. 

Remember, a loan is an enabler, only if you can pay it back comfortably. Otherwise, it can become a liability.