With interest rates expected to remain high in 2011, it will be easy to borrow — but repayment may not be so easy. If you are planning to take a loan for your dream home or for any other purpose, prudence on debt should be your mantra.
With the emergence of all sorts of loans and credit cards, individuals are prone to assuming debt, but experts say one should know when to stop leveraging -- or stretching yourself by borrowing. Plan your loans in a way that there should be some portion left for savings at the end of the month.
Though the ratio may vary in line with family income, experts suggest you save between 10% and 30 % of your income after you have paid the equated monthly installments (EMIs) on your loans.
“The savings will act as a cushion in rainy days and a person will be able to pay the EMI from the corpus built from the savings,” says Lovaii Navlakhi, managing director and chief financial planner, International Money Matters.
Many people seem to forget that a loan brings an accompaying responsibility of repayment, and that is where the debt trap begins. Miss out on an EMI, and a vicious trap opens up — a cycle of postponed EMIs, leading to issues that usually culminates in the borrower and the lender landing in court.
Experts say that it is better to get rid of a high-interest loan from a low interest-earning fixed deposit. If you have a fixed deposit that earns you 8%, it is advisable that you pre-pay your personal loan that is costing you 15% in interest.