When is it okay to opt for a loan?

Despite the RBI keeping interest rates unchanged for the time being, bank deposit rates are already heading south and loan rates are expected to follow suit early next year. So, taking a loan will become cheaper in the near future. But does this mean that you should opt for one? Easily available, loans today have become a part of our lives. Banks, housing finance companies and non-banking finance companies are all eager to give us loans. Various offers and teasers are used as baits to lure customers. Most of us apply for loans when we are buying a home or car or when there is an emergency requirement of funds, but rarely understand the impact of interest in the long run.

As financial planners, we always review existing loans, give suitable recommendations, and ensure that our clients do not take loans without talking to us. After all, it has a direct impact on one’s future goals. If you take a loan without understanding its impact on your finances, you could be jeopardising a future goal. Your net surplus income should be allocated and invested systematically in order to achieve your financial goals. If you opt for an unplanned loan, then it will definitely reduce your available surplus for regular investments and will adversely affect building of corpus for your financial goals such as children’s education, marriage, retirement etc.

To be fair, taking a loan becomes necessary in some situations. And since you cannot shy away from loans all the time, you have to decide when is it okay to borrow. The answer depends on the purpose for which a loan is taken. The first important criterion is to understand whether the loan is adding to your asset or to your income. Secondly, it should be appropriate for your circumstances. Banks or financial institutions normally give loans on the premise that the aggregate of all your EMIs does not exceed 50% of your monthly income. But a prudent financial planner will advise you to keep this ratio at 35%. This means your monthly EMIs, of all your loans taken together, should not exceed 35% of your monthly income. So, to decide whether a loan is bad or good, you need to evaluate these two criterions and then take a decision.