Availing a loan can help people fulfill their financial requirements which otherwise might seem difficult owing to their limited monthly income. Easy availability and flexible repayment options have made loans a popular source of financing amongst the middle-class citizens. Be it buying a home, a vehicle, funding children’s education or covering wedding expenses, availing a loan can help people get access to the required funds. However, before applying for any type of loan, borrowers should evaluate their repayment capacity carefully. This can protect them from falling into a debt trap in the future.
Therefore, if you are looking forward to availing a loan, you must evaluate the following aspects carefully:
Will the loan impact your personal finance?
- Availing a loan is a sensible decision if the borrowed amount helps you generate income in the future. On the other hand, if you take up a loan to purchase a depreciating asset, then it can take a toll on your personal finances.
- You should avoid opting for a loan that is harsh on your pockets and comes with high interest rate.
How many loans can you afford?
- You should only opt for loans that you can repay easily without disturbing your other financial obligations.
- If you already have an existing loan such as a home loan or a personal loan and you spend a major portion of your monthly income paying EMIs, then you should avoid taking up any other loan.
- Also, too many loans may put you at risk of defaulting the loan. This can hamper your credit score to a great extent.
Check your Debt-to-Income ratio
- Another way to check if you can afford a loan is by looking at your debt-to-income ratio. This financial ratio is usually more relevant for personal loans and home loans, but it can also be helpful to check business loan affordability.
- A debt-to-income ratio gives you a sense of whether you are in a good place to take on more debt.
Calculate the EMI before availing the loan
- While availing a loan, you should calculate your EMI beforehand with the help of an online home loan EMI calculator. This will give you a better understanding of whether you are in a position to afford the loan.
- Moreover, having an estimate of your EMI will allow you to plan your budget in a much better way.
By following the above-mentioned suggestions, you can be more aware of your current financial status. Thus, you will be able to make a well-informed decision regarding whether to avail a loan or not.
If you happen to avail a loan, ensure that you settle for a financial institution that offers the most competitive interest rate. This is because even a slight reduction in the interest rate can reduce the overall cost of borrowing significantly. Lastly, make sure that you do not forget to read the terms and conditions of the loan agreement carefully before signing it. This will help you avoid any inconvenience in the later stage.