Taking a loan? There is more to it than just the interest rate. Here, we tell you what to look if you are going for a loan.
1. How much are you expected to pay upfront?
In virtually all cases, you are not given the loan for the entire amount; you're given just a part of it.
So, you may get a loan for around 80% to 90% of the cost of the home, vehicle or consumer durable you are buying. Even for education loans, you will have to put in a small amount of the total fees.
The amount you put in is referred to as the margin amount. The amount the financier gives is the principal.
In addition to this, you will also have to pay administration or processing fees. Check if this is a fixed amount or a percentage of the loan.
2. How much EMI you can afford?
The Equated Monthly Installment is the amount of money you will have to pay every month towards repaying your loan.
It is a combination of interest rate payment and principal repayment. Read Understanding EMI to understand how the EMI is computed.
Your income and repayment tenure will determine the EMI. You should go for an EMI that you can comfortably repay. Read Are you comfortable with your EMI? to help decide how to arrive at it.
3. What are the tax benefits?
It's nice to know that you get a tax break on some loans. But only two loans offer the tax benefit.
Education loans have a tax benefit. Read Tax benefits on education loans.
The most well known tax benefits are the ones on home loans. Repaying a home loan? will tell you the tax benefits on principal repayment of your home loan while Paying interest on home loan? will tell you the tax benefits on interest payment.
But, if you take a consumer durable loan, a car loan, or a credit card loan, you get no tax benefits.
4. Is there any prepayment penalty?
Always check this out if you have an intention of repaying your loan before the tenure ends. Sometimes, you are not charged anything. Sometimes, you are charged only if you repay the entire balance principal, not if you repay a part of it.
Consider the future. Are you expecting a windfall from the sale or an asset (shares or property) or a bonus or a substantial raise. Even if you don't have any money now, you may think of using this to repay your loan sometime later.
So check this aspect out.
5. When is the EMI date?
Once you fix your EMI date, the financiers don't change it. Think carefully before you set it.
Don't put it towards the end of the month when you bank balance gets depleted. Don't put it on the first of the month because, sometimes, salary payments may get delayed by a day or two.
It will be safe to put it in the first week of the month.
If you are also servicing another loan too, make sure you have sufficient funds during that time of the month to make both payments.
6. How is the rate of interest calculated?
Don't just ask what the interest is but check to see how it is computed.
Let's say you are taking a loan of Rs 1,00,000 at 8% per annum for one year. You go to three players and they all say that they will give it to you at 8% per annum.
Yet, if you compare their EMIs, it may be Rs 9,000, Rs 8,699 and Rs 8,553.
That is because of the way it is computed. The more frequently computed, the better the deal you get. In the above example, it is calculated on an annual reducing basis (Rs 9,000), monthly reducing basis (Rs 8,699) and daily reducing basis (Rs 8,553).
This means that, when you make your payment, the next EMI takes into account the principal amount repaid. If it is daily computing, it is taken into account the very next day. For monthly reducing, the next month, and the next year for annual reducing basis.
So always compare the EMI of various financiers with a similar amount and tenure.
