Life with Loans – Right Formula!
Mr. S.Sridharan, Head – Financial Planning, Wealthladder.co.in justifies that it is absolutely inevitable to borrow loans in one’s life.
Mr. Sridharan does explain that an individual borrows funds or loans for right from general consumption of TV, AC etc. to purchase of house, educational loan, business loan etc. As a result of these loans, the individuals are required to repay the loan amounts right from the first month earning. Once a person gets a job and salary through bank, he gets various instruments such as debit and credit cards and other avenues for getting loans for different purposes.
Loan is good or bad?
In this modern world, getting a loan is part and parcel of one’s life. However, one should exercise a sense of caution while availing of the loans. For example, one should refrain from the practice of getting loan through credit cards, loan for purchase of vehicles etc. because the interest rates that are applicable for these types would normally be high and also these loans would hardly help one to increase his wealth accumulation in effect. At the same time, housing loan is allowable since it directly leads of wealth accumulation for an individual.
Credit Card Loan:-
One must be fairly careful in handling loans through credit cards. As far as possible, it is better to avoid since a) the interest rate will be comparatively higher; b) in case of failure to settle the loan on time, it would entail penalty and c) in case the loan is not discharged even with penalty, there is every likelihood that the name of the loanee would reflect in the CIBIL (Credit Information Bureau (India) Limited) with its own adverse consequences.
Most of the companies or institutions allow 7-year period to discharge the car loan. It is always better to settle it within 4 years with one one’s own personal source to the tune of 20% to 30% and balance only as loan. As regards 2-wheeler it would be wise not to go for loan at all.
How much is too much?
Thumb rule is one should keep the loan amount within 50% of his net earnings. In particular, one should keep his individual loan, credit card loan, vehicle loan, jewel loan etc.as purely temporary or based on emergency.
To cite an example, if all the above-mentioned loans total up to 30% of one’s salary and if one applies for a home loan, he will be sanctioned maximum of what he will be able to pay the EMI against 20% of his salary. Due to this, he may not be in a position to buy the house property which is why one should think twice before going in for any loan at any point of time.
Vision of the Future is Essential:-
Current income and expenditure alone should not be the criterion for availing of loans. One should anticipate his other family commitments like parents’ maintenance, health aspect, children’s education, marriage etc.
Loan before 50:-
Golden Rule is whatever loan that one may avail of, he must ensure to settle all the loans before reaching the age of 50 because in case the EMI period extends beyond the age of 50 years, he may be required to go for further employment even after retirement in order to be able to clear the loans. Moreover, one’s health status can not be predicted after 50 years. In addition to these limitations, children’s higher education needs, marriage requirements etc. will also have to be attended to at that time. Hence it is imperative to plan ahead properly and effectively before taking any loan for that matter. Similarly and generally, it would be only wise to plan and decide which loan to take, when to take and before what age to return so that one can continue to enjoy the so-called financial independence and control.
Prudent Planning is always wise; haphazard approach is always a vice.
(This article originally appeared in Naanayam Vikatan Issue dated 9-11-2014. Now reproduced in English by P.S. Ramamurthy)