3 Things to Keep in Mind if You are Thinking of Applying for a Loan
Now is the best time to apply for a loan if you are in need of financing. Interest rates are attractive, and banks are welcoming borrowers with respectable credit scores and history. You can get loans to meet your financial requirements.
A report published by the RBI (Reserve Bank of India) in February 2018 reveals that banks have changed their strategy to ensure the growth of retail loans. This growth is mainly due to the slowdown in corporate loans and loan recovery. Also, retail customers have more disposable income, and as a result, they do not default on their loans.
While banks are more than willing to offer Loans Against Property as well as other types of loans, there are a few things that you need to take into account before signing on the dotted line. Knowledge is power and this power will prevent you from making avoidable mistakes.
1. Borrow What You Can Repay
When you Apply for a Loan Against Property, the bank takes into consideration the value of the property. Usually, you are entitled to 50-90% of the property value. Depending on the value, this percentage can be a significant amount, and it may be tempting to take the entire amount. Refrain from it. Instead, opt for an amount that you can afford to repay without feeling the pinch.
Rule of thumb dictates that your Home Loan EMI (Equated Monthly Instalment) should be less than 40% of your monthly income, and all EMIs (this includes Home Loan, auto loan and Personal Loan) together should not be more than 50% of your monthly income. So, ensure that the loan-to-income ratio is within your means. If you have other financial obligations, consider them when applying for the loan. This way, you will not miss an EMI, and your credit profile will remain stellar. So, you will not mar your chances of getting a loan in the future.
2. A Shorter Loan Tenure Will Save You Money
Extending the tenure of your property loan may appear attractive as the EMIs will reduce. However, when EMIs become lower, you end up paying more interest. In fact, this holds true for any loan that you take.
Look for a lender, who does not charge you for prepayment of the principal. Whenever you have surplus money in the form of a bonus or dividend, pay the principal to reduce the tenure of the loan. By shortening the tenure of your loan, you will be paying less interest. In the long-term, this will be a saving for you that you can invest to create wealth or use it for other essential expenses in life.
3. Pledge Investments if Interest Rate is High
Pledging investments is an excellent way to repay loans with a high-interest rate. You can pledge mutual funds and life insurance policies. Banks usually charge a lower interest rate on loans that you take against these investment products.
When you use investments as collateral, banks issue a lien against them until you repay the principal and interest. Once you pay in full, the lien will be removed, and you will get access to your investments without any hassle.
Typically, you can get 50% of the NAV for equity-linked mutual funds. When it comes to life insurance, banks extend loans against traditional life insurance, linked policy, and endowment policy. You cannot avail loans against term insurance plans. When you use policy as collateral, it is mandatory to repay the loan within the policy term.
Summing it Up
When applying for a loan, understand the factors that have an impact on eligibility criteria. Banks will limit the monthly EMI to 40 to 50% of your salary. For salary, banks take into consideration the basic salary and dearness allowance. Banks do not consider other allowances and reimbursements. It is also important to note that if you have other loans and financial liabilities, the amount of loan will reduce even further. Some banks may also take into account the number of dependents you have as this means your ability to repay reduces.
Banks also consider your profile to determine the loan amount. If you have a full-time job, it is easier to get a loan compared to a person who is self-employed without a stable source of income. Furthermore, banks take into account your age to sanction the loan. Your age gives them an idea about the earning years you have and this, in turn, will determine your ability to repay the loan. If you avail Loan Against Property, the tenure will be until your retirement against unless there is a younger co-applicant. You can get a major child or family member to sign as a co-applicant, and this can increase the loan amount as the co-applicant’s income will be added to your income.
When it comes to a loan, your search ends with MyMoneyMantra. Our team of financial experts will help you find the best loan to meet your financial needs and goals.
Also Read: Home Loans in India – 21 Myths Vs. Facts
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