5 Important Borrowing Lessons

5 Borrowing Lessons For Financial Well-being

5 Important Borrowing Lessons

5 Borrowing Lessons For Financial Well-being

Introduction

In this article, we will discuss 5 borrowing lessons (lessons while taking loans) for financial well-being. These borrowing rules will help you to ensure your financial freedom and your long-term financial health.

Financial Planning Knowledge Bank by Invest Yadnya
Financial Planning Knowledge Bank by Invest Yadnya

Important Borrowing Lessons For Financial Well-being – To Ensure Your Financial Freedom

  • It is true that loans are helpful in meeting your key financial goals in all stages of life. These crucial goals might be financing for :
    1. Need-based goals like your dream home, building up the capital for your business, children’s education, children’s marriages
    2. Want-based goals like world travel, buying second house
    3. Luxurious Lifestyle goals like buying big car
    4. Emergencies if any
  • Thus, loans allow you to make crucial decisions and help you meet your financial goals without waiting to accumulate the required money for the above mentioned things.
  • Lets discuss key borrowing lessons in detail to ensure your long-term financial health.
5 Borrowing Lessons For Financial Well-being
5 Borrowing Lessons For Financial Well-being
1. Opt for loan tenure wisely
  • While calculating your monthly EMI figure, loan tenure plays a major role. Opting for lower loan tenure means higher EMI, which also leads to lower interest cost.
  • On the other hand, when one opt for higher tenure in order to reduce the monthly EMI need to be paid, he/she actually increases the interest cost of loan on account of higher loan tenure. And here power of compounding of will hurt your investments in the long-term.
  • Thus, one should ideally decide loan tenure on the basis of repayment capacity and contribution required for other financial goals. Opt for a shorter tenure if you can comfortably repay your EMIs by the due date without sacrificing your contribution towards other financial goals.
2. Compare Loan offers of banks or lenders
  • Before you opt for any bank or lender, it is very important to conduct a thorough research. You should compare lenders based on different parameters to avail the best deal.
  • One shouldn’t take the decision only on the basis of competitive interest rates on loans offered by banks.
  • Several factors other than interest rates, such as prepayment charges, processing fee etc. would also determine your overall cost of the loan.
3. Don’t make inquiries at multiple lenders
  • Whenever you make a loan or credit card enquiry, lenders fetch your credit report to evaluate your creditworthiness.
  • Such lender-initiated requests are treated as hard enquiries for which credit bureaus reduce your CIBIL credit score by a few points.
  • Hence, initiating multiple enquiries within a short time span will lead to faster reduction of your credit score.
4. Monitor guaranteed or co-signed loan account
  • Guaranteeing or Co-signing loan account makes you equally accountable for its timely repayments. Any defaults or negligence in such loan accounts will equally affect the credit score of the co-signor or guarantor.
  • Hence, you should not co-sign or guarantee loans unless you are sure of the repayment capacity and creditworthiness of the primary borrower. Once, you co-sign or become a guarantor of a loan, observe it carefully to ensure timely repayments.
5. Don’t miss EMI payments
  • Any delays or defaults in making loan or credit card repayment :
    • Attract fines and penal interest rates
    • Impact your credit score adversely
  • Your repayment track record is widely believed to receive the maximum weightage of all the other factors considered by the credit bureaus in calculating your credit score.
  • Thus, any delay or default in making loan or credit card repayment is reported by the lenders to the bureaus, which then reduce your credit score accordingly.

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