Many people just avail a loan without thinking about the consequences and end up falling into a loan trap. To come out of the debt trap, they struggle even harder. To avoid falling into the loan trap, you must always follow some rules before availing a loan. In this blog, we will be discussing the top 5 rules one must follow while availing a loan.
1. Avail a loan only when you need it
People often get calls from banks, offering loans at low interest rates. Banks convince people to avail loans, even if they do not need them. But, do not fall for such tactics. You must avail a loan only if you really need it and have a proper reason for availing one. Don’t avail loans just to claim tax benefits.
When you avail a loan, you should be able to repay. If you borrow more than you can repay, there are chances you will fall into the debt trap. Your equated monthly installments (EMIs) should be affordable. Home loan EMIs you pay to the bank, should not be more than 40% of net monthly income. Make sure your personal loan EMI, is not more than 10% of your net monthly income and your car loan EMIs should not exceed 15% of your net monthly income.
While availing a loan, borrowers often prefer a long tenure as this reduces EMI payouts and provides tax benefits. But, one thing you should always keep in mind is, if you opt for long tenure, you will have to pay interest for many years. To avoid high interest, it is advisable to opt for a shorter tenure.
Many people just sign the loan documents without reading them. But, doing so can lead to a lot of problems. Borrowers must always read the fine print, before signing the documents. This is because most of the time, suspicious clauses will be hidden in the fine print.
It is very important to avail a term life insurance, if you have a big size loan such as home loan or business loan. This is because if something happens to you, your family can repay the loan using the death benefits; they would receive from the insurer.