Affording a loan is different from EMI affordability.
Street Talk
Expert Opinion
Our social set-up has undergone a sea change. In fact, it continues to gladly fall in line with the changing times. Whatever the nature of changes taking place around us, there is a common force which drives these changes to the grass root level. This common force has its might in finances. In other words, finance is the lone element fueling today’s social change; of course, for betterment.
So availability of finance in the modern times holds the key to witnessing the living standard of societies getting modernized. But when it comes to availability of finance, the resources for larger parts of the societies were scarce till banks and financial institutions liberalized lending policies. This paved the way for almost all segments of populations to avail loan facilities irrespective of their economic status.
However, when obtaining a loan through online mode has become a reality, it’s the convenience granted to the customers to obtain a loan which pulls crowds at bank loan counters and not the cost of loan which includes its interest component, loan processing fee etc. In majority cases, a loan brings peace, prosperity and profits to the borrowers, subject to the condition the borrowers remain faithful and honest in their dealings.
Notably, utilizing the bank loan for the activity it has been obtained translates into growth of money. Contrary to this, any diversion of loan amount will result in low economic activity and threat always looms large that loan repayment may get hampered. And in conditions when a borrower fails to deposit EMI (monthly Equated Installment) on time, a loan then only breeds stress.
Today, living on a bank loan or more precisely on equated monthly installments (EMIs) has become a norm for almost all families if not every individual. The kind of fast growing consumerism coupled with an emerging sea of personal needs has forced almost all segments of populations, especially the young generation to live their life on a bank loan.
In other words, loans have now been shaping the way of life to realize growing aspirations as everything is available on EMI. Now people think EMI, eat EMI and breathe EMI.
However, you have to understand that affording a loan is different from EMI affordability. You may be able to afford an EMI for a few months or some years but not the actual Loan. For paying an EMI on a long term basis, you are ignoring future needs. You may consider an increase in your future income, but then inflation will also rise and there would be other added expenses simply adding to your financial burden. One more thing is that you may afford higher EMI today, but this way you would be having lesser chances of saving for your future. Needless to mention that over a period of time you would be loaded with more responsibilities in life and to shoulder them savings for the future is inevitable.
You must understand that when you purchase something on EMI, it may be for immediate gains, but at the end you pay for a period of prolonged pain. These EMIs, of course, help you to have goods that you might not have been able to otherwise afford – from kitchen appliances and washing machines, to luxurious cars and high-end electronic gadgets, including smartphones, tablets and LED TVs, etc. But these consumer goods are essentially depreciating assets and you are paying more for something that is fast losing its value, and paying more for it over the long run.
So while opting for loans, it is always necessary to look beyond the initial years and calculate the potential impact that EMI payments will have on your future financial life. It is just a matter of good financial planning.
Notably, when you think about getting a loan, it is important to look at the situation, both from the bank’s perspective and your present and future financial strength. To the bank, loans are a major source of revenue as they charge interest on the moneygiven to you as a loan. So, these loans, for whatever purpose, are not given in charity by the banks. It’s an asset for the banks and, remember, a liability for you. If you as a borrower fail to repay the loan in the given period of time, it can turn into a major financial liability as well as reputational risk for you.
Precisely, while boarding on a loan platform you should ensure that your borrowing is prudent and need based. You should not err into borrowing just because loans are easily available. Too much borrowing can leave you in difficulty in repaying a loan. It’s important for you to consider your income before raising a loan. Never go beyond your repayment capacity. Normally, 35 percent of income going to EMIs is considered reasonably good in financial planning.
Now a word about personal loan. It’s a cash loan facility with minimum documentation. The banks give this loan against your future income and the funds are instantly credited to your savings bank account.
Any person having a regular monthly income is eligible to take the route of this loan Scheme. Different banks have different parameters for the scheme. Mostly, the banks prefer to extend this kind of loan facility to salaried persons falling in the age group of 21 to 60 years. For those associated with business, the age limit is extended up to 70 years. In all cases, it’s the amount of monthly income which is taken into consideration by the banks to arrive at the quantum of finance.
Before looking at personal loan as an option to meet urgent needs, one should look at the cost of the loan. Here it’s important to know the rate of interest charged by the bank. Interest rate varies from bank to bank. Today in a scenario when banks rate their borrowers on the basis of credit score, you with a good credit score, can negotiate for a low interest rate. So, don’t be surprised to find a bank charging different borrowers with different rates of interest in a single loan scheme.
Tenure of loan also affects the cost of loan. Personal loans are to be repaid in equated monthly installments (EMIs). Your EMI depends on your principal loan amount, rate of interest and loan tenure. These loans are to be repaid usually within 5 to 10 years. But remember, the shorter the repayment period of a personal loan, the better it is.
Meanwhile, you need to look at an important question. What will happen to a family if their family head saddled with a liability of bank loan is consumed in an accident or long-term illness or faces a sudden death? If he is a lone bread earner, an unfortunate death can create serious financial problems for his family. Who will help them to settle the financial commitments in his absence?
It is here that you need all-important shelter, which can guarantee repayment of your loan amount without burdening your loved ones. Here the best way to nip the evil of this risk is to transfer it through the medium of insurance. As a safeguard against these risks, one can take the route of a loan protection insurance plan to insure his/her outstanding amount. Under this plan, the loan outstanding against the borrower is adjustable from the proceeds of the claim in the event of the death of the borrower and the whole outstanding amount is paid by the insurance company.
(The author is a veteran journalist/columnist. He is former Head of Corporate Communication & CSR and Internal Communication & Knowledge Management Departments of J&K Bank)