Every one of us has certain dreams that we wish to fulfill. Certain dreams, like buying our dream home or dream car, require some external help in monetary terms. This help is provided to us by banks and financial institutions in the form of financial assistance to an extent. This financial assistance is a loan. Loan is an agreement, in which a lender gives money or property to a borrower and the same agrees to return the property or repay the money, along with interest in the future. Loan provides a large sum of money for the time being, but, with this, we also have to return the money borrowed with interest to clear the debt. Interest rate is the extra amount that the borrower pays to the lender.
The borrower is called a debtor, and the lender is called a creditor. The interest rates are noted on a yearly basis and decide what would be the monthly repayments on the loan.
4 Things to know
Being smart with funds and the future is very important. Loans can be our best friend momentarily but if we do not pay the interest rates on time they can start piling on to become a huge issue.
Choose the Right Interest Rate
Every interest rate comes with advantages and disadvantages, so choosing the right kind of interest rate suiting your repaying capacity is essential. Selecting the loan on the basis of interest rates and free processing is one of the smart ways to save. You can choose loans which involve fewer EMIs along with charges of prepayment. According to the new rule recognized by the RBI, banks are debarred from collection of prepayment penalty from the loan borrowers for hovering interest rates. Now it is very simple to change the loan from one bank to another along with the relocation of balance amount.
Type of Interest Rate
Choose wisely between Variable Rate Loan and Fixed Rate. In a variable interest rate loan, the interest rate levied on the amount of money due, differs as the market interest rate modifies. As a result, the payments will also vary as and when the interest rate shifts. In a fixed rate, the interest rate will be locked in for a period of 1 to 5 years. If interest rates fall, you pay the higher rate but if interest rates go up, you pay the lower fixed rate. The locked period is flexible; it depends on the negotiations made with the creditor.
The Unseen Cost of Borrowing
Borrowing or taking loans is not free of cost; it costs money. The more time one takes to return the loan amount, the more it is likely to cost. This is the major reason it is essential to repay the loan as soon as possible. If we do not pay the interest on time and miss it, the charge is likely to get higher. Clearing your loan by paying off the interests is significant because when you want to repay it, you have to earn more money to pay back the loan amount along with the interest and also pay taxes on that earned money. In other words, you have to repay the loan with interest with the after tax money. This is the unseen cost that comes into picture while borrowing.
Be Aware of the Concession Schemes
Exceptional schemes for senior citizens and women borrowers are offered by many banks which are likely to save substantial sum on the interest rate. Schemes like a joint loan and hybrid loan should also be looked upon to save upon interest.
Buying a loan seems easy but comes with a lot of strings attached. One should carefully examine the terms & conditions before buying the loan.