:: SEBI Investor | Money matters: Think Before you Borrow Money::

You may need to borrow money when you do not have enough savings to buy what you want or to meet expenses related to emergencies like medical needs etc. One should not take loans for meeting avoidable and unnecessary expenses. Borrowing money comes with huge financial responsibilities and potential risks.

Banks offer loans for various purpose – such as to buy car (car loan), to buy house (house loan). Loan can be secured loan or unsecured loan. With secured loan, the asset is pledged to the bank as collateral. If secured loan is not paid, the asset can be sold to recover the loan. Examples of secured loans are housing loan, car loan. In unsecured loan such as personal loans, assets are not pledged as collateral.

Before you Borrow

Check whether lender is regulated or licensed. Never deal with unlicensed or un-regulated lenders.
Check whether you have the capacity to repay the loan.
Compare the interest rates of various lenders. This ensures you get the lowest rate.
Check how interest is calculated: - In a flat interest rate, you're charged interest on the full principal amount you borrowed. On the other hand, in a reducing interest rate, the interest you pay goes down as it's calculated on the outstanding amount.
Depending on your ability to pay, decide on repayment period. Shorter the loan repayment period, less is overall interest paid (and vice versa).
Assess all costs such as processing fee, pre-payment charges, late payment fee, etc. before you sign loan document.

After you Borrow Money

Important points to keep in mind after you borrow money:

Make your repayments on time and in full to avoid any penalties or additional charges.
Repay part or full loan early if you have spare cash — but check if there are any pre-payment charges.
Review your borrowings regularly.
Avoid borrowing too much and taking too many loans as you could be over burden.