In an ideal world, everybody would have enough money for all his needs. In reality, many of us have little option but to borrow to meet our goals, both real and imagined. For banks and NBFCs, the yawning gap between reality and aspirations is a tremendous opportunity. They are carpet bombing potential customers with loan offers through emails, SMSs and phone calls. Some promise low rates, others offer quick disbursals and easy processes.
While technology has altered the way loans are being disbursed, the canons of prudent borrowing remain unchanged. It still doesn't make sense to borrow if you don't need the money. Or take a long-term loan only to enjoy the tax benefits available on the interest you pay.
If you take a large home or car loan, it is best to take insurance cover as well. Buy a term plan of the same amount to ensure that your family is not saddled with unaffordable debt if something happens to you. The lender will take over the asset (house or car) if your dependents are unable to pay the EMI. A term insurance plan of Rs 50 lakh will not cost you too much.
Typically, banks push a reducing cover termplan that offers insurance equal to the outstanding amount. However, a regular term plan is a better way to cover this liability. It can continue even after the loan is repaid or if you switch to another lender.
A long-term mortgage should never be a sign-and-forget exercise. Keep your eyes and ears open about the new rules and changes in interest rates. The RBI is planning to change the base rate formula, which could change the way your bank calibrates its lending rates. Keep shopping around for the best rate and switch to a cheaper loan if possible.
However, the difference should be at least 2 percentage points, otherwisethe prepayment penalty on the old loan and processing charges of the new loan will eat into the gains from the switch.
Before you take a loan, discuss it with your family. This is important because the repayment will impact the overall finances of the entire household. Make sure your spouse is aware of the loan and the reasons for taking it.