7 Steps to Responsible Borrowing


Are you comfortable to buying money from your bank? Do you know how much you can afford? Do you feel you are choosing the correct loan? If your answer is ‘No’ to any questions, this is the article for you to make confident and competent in your relationship as a borrower.It is better to cut your coat according to the cloth. If you can’t afford to repay a loan, you should not take it! But how do you borrow wisely? To answer the question, it is best to begin with what you are borrowing for. Is it for consumption or you are buying as asset which will be put to productive use? How do you decide whether you are making a wise and responsible borrowing decision? Follow this 7 steps and you will be sure.

STEP 1 – Make sure you can afford it – you have to pay it back

Look at your monthly budget carefully before borrowing. You need to have a good idea of whether you can afford it – not just today but also in future. The following factors will help decide how much you can ultimately afford:- Cash flow you can be absolutely sure of – monthly income from business or salary.- Have you provided for unforeseen expenses – think about what would happen if an unexpected bill arrives.- Don’t borrow to the very limit of your finances – earmark about half your monthly income for assert creation and debt repayment.

STEP 2 – Shop around – Interest is represented in various ways

Do your homework. While it might not be the most interesting way to spend your time, getting familiar with the different lenders in the market, and the loans and rates they offer, is vital. Choosing the lowest interest rate obviously helps you to save money but be aware that there are many components to this. Is the loan being calculated on a fixed or floating basis? Is it on a reducing balance or flat rate? Be aware of what’s on the market and make sure that what you finally choose suits your situation.

STEP 3 – Duration – Short term is better

A longer term loan usually leads to a more appealing, smaller repayment every month. However, if you can comfortable pay off a largest sum towards the loan every month, without hurting your lifestyle and other fi9nancila commitments. You should prefer a shorter duration. A long repayment period may mean lower repayments but it also means you will pay more interest over the life of your loan. Review the complete payment schedule. Find out how much you will have to pay in total when the final payment is made.

STEP 4 – Financial planning – Focus on it

Money is one of the important elements one’s life. To ensure that you get the best out of it, plan your finances. Don’t be lazy when it comes to managing your money. If you have surplus or idle money in your savings account, it makes sense to reduce the dues outstanding on credit cards. You cannot allow for irrational decision, pay higher rates of interest, and expect to be wealthy somebody.

STEP 5 – Juggling debt – a strict NO

You may have overestimated your ability to pay back a loan and may find it difficult to keep up with repayments. Don’t borrow money to pay off and existing loan – it will only lead to more financial institutions calling you for payments. Cut your expenses instead or else you could be a few steps away from falling into a debt trap. Meet up with your banker, financial advisor or visit a financial counseling center and discuss your situation.

STEP 6 – type of loan – reduce your high cost debts

There are loans and then there are loans. What type of a loan should you prefer for a particular expense? Typically, high cost, unsecured loans like personal loans and credit cards are meant for emergencies or short- duration-repayment plans. Revolving on credit cards is for short durations, say a few months. Beyond that, migrate it to a personal loan at lower rates of interest. Secured loans such as mortgages and care loans are cheaper and for longer terms.

STEP 7 – Read every word in the loan document

Once you have made up your mind for a particular loan, check the fine print in the application form. Thke the trouble to read the Most Important Terms and Conditions – all lending banks are mandated to share it with you – and make sure you understand it.Make usre you have evaluated all pros and cons, terms and conditions before you put pen to paper.One final thought: If you hear something that’s too good to be true, it probably is. Don’t believe it. Do your due diligence – follow these seven steps – and you can be sure of reaching a responsible decision.

This article source and credit: ICICI Bank, India.