Don’t let a loan burden you; follow these steps for better planning

Usually, most individuals look at convenience while taking a loan without comparing rates and the spread on it. Financial planners suggest that you shop around for better interest rate.

Have you ever taken a loan? Did you manage to crack the best deal in the market. One of the things to get a better deal is a good credit report and a good credit score. , which factors in your repayment capacity and credit behaviour. However, there are multiple other factors that play a spoil sport in picking the right loan.

There are multiple factors that play a spoil sport in picking the right loan.(Shutterstock)

Compare the interest rate

Loans are usually taken when you are falling short of your savings or income to meet the expenses, such as paying for medical expense, buying a phone or purchasing a car.

Usually, most individuals look at convenience while taking a loan without comparing rates and the spread on it. Financial planners suggest that you shop around for better interest rate.

Generally, borrowers tend to choose a financial institution with which they already have a savings account or any other banking relationship.

You should always first check for the best rates available for loans in the market followed by convenience to get the loan and not the other way round.

Opt for shorter tenure for loan repayment

Usually, the financial institution will give you multiple tenure options. The longer the tenure, the lower will be the equated monthly instalment (EMI) outgo. If the tenure is shorter, the EMI outgo will be higher.

For instance, if you take a loan of ₹5 lakh at 11% interest rate for three-year tenure, your EMI will be ₹16,369. For a five year loan, the EMI will be ₹10,871.

However, the interest outgo at ₹89,297 for the three-year loan is lower compared with ₹1.52 lakh for a five-year loan. Hence, it is always better to opt for the shorter tenure. Even if the interest rate is higher for shorter tenure loan as against the lower interest rate on higher tenure, it will be beneficial to pick shorter tenure.

Check for other charges, penalty

A lot of times, people miss to factor in processing charges while calculating the overall cost of the loan. If the processing charge is higher but the rate is lower by 10-15 basis points (bps), then you may not get any major benefit.

One bps is one hundredth of a percentage point.

Another point to factor in is to look at penalty or limitation. For instance, most financial institutions impose a prepayment penalty, especially for personal loans. Hence, if you want to prepay the loan you may end up losing money.

To avoid that or to minimise the impact you should check for the prepayment penalty charges before opting for a loan.

Taking a loan to splurge or to meet lifestyle expenses is not advisable.

However, if you still end up taking a loan, make sure that you compare the rates, opt for a shorter tenure and also check for other charges and penalty clauses.

You already are paying more for your buy; you don’t want to waste money where you can save by being prudent.