Taking a loan has become easier than ever, whether it’s for buying a house, a car, or funding education. Banks and NBFCs (Non-Banking Financial Companies) offer a range of loans to suit your needs. But getting a loan is just one part of the story — managing it smartly is key to staying financially stable.
Here are 5 common mistakes people make when taking loans and how you can avoid them to keep your financial future on track.
1. Understand the Difference Between Fixed, Floating Rates, and APR
The first step before taking any loan is to know the type of interest you’ll be paying.
- Fixed Rate Loans: The interest rate remains the same throughout the loan term. This is good for people who prefer consistency in their payments.
- Floating Rate Loans: Here, the interest rate may go up or down depending on the market conditions. This can be risky if rates increase in the future, but beneficial if rates drop.
- Annual Percentage Rate (APR): This is not just the interest but includes additional costs like processing fees and administrative charges. APR gives you a complete picture of how much you’re really paying.
Most people don’t factor in these additional costs, so take the time to calculate your true financial obligation before you sign any loan agreement.
2. Don’t Underestimate the Cost of the Loan
Before applying for a loan, make sure you understand the total cost, including interest, taxes, and any hidden fees. Many people underestimate the actual amount they’ll need, especially for long-term loans like home or education loans.
For example, if you’re taking a home loan, consider not just the cost of the house but also stamp duty, registration charges, and legal fees. For car loans, think about insurance and maintenance costs. A loan that seems affordable initially might burden you down the road if you don’t calculate these additional expenses.
A clear and realistic cost estimation will prevent you from running into financial trouble later.
3. Pick the Right Loan Repayment Plan
Choosing the wrong repayment schedule is one of the biggest mistakes people make. A shorter repayment tenure means higher EMIs (Equated Monthly Installments), which can strain your monthly budget.
While it’s tempting to pay off the loan faster, consider your other expenses. A too-aggressive repayment plan can leave you with little to cover daily essentials and emergencies.
Here’s how to choose wisely:
- Evaluate your current income: See what EMI amount fits comfortably without affecting your monthly needs.
- Account for future growth: If you expect your income to rise in the future, you can opt for a slightly higher EMI. But don’t rely on this too much.
- Check for prepayment penalties: Some banks charge a fee if you want to pay off the loan early. These charges can be as high as 5% of the remaining loan balance, reducing the benefits of early repayment.
4. Avoid Delaying Loan Planning
One common mistake people make is delaying their decision to take a loan. The earlier you take a loan, the sooner you can pay it off. Delaying your loan decision, especially for home loans, can lead to complications later on.
For instance, if you’re in your late 40s or 50s, banks may offer you a shorter loan tenure or higher interest rates. On the other hand, if you take a loan in your 30s, you’ll have more flexibility with lower EMIs and longer repayment options.
Remember, the sooner you take the loan, the sooner you can close it and secure your financial future.
5. Don’t Stop Saving and Investing After Taking a Loan
A big mistake people make after taking a loan is to stop saving and investing altogether. While loan repayment should be a priority, you still need to plan for future expenses and retirement.
- Start a separate emergency fund: Having a backup fund for unforeseen situations like medical emergencies or job loss will help you stay afloat without disrupting your loan repayment.
- Continue small investments: Consider mutual funds or recurring deposits that give you good returns over time. You can use this money for future needs like children’s education or retirement.
Paying only your loan EMIs isn’t enough to secure your financial future. Balancing both repayments and long-term investments will ensure you’re financially prepared even after the loan is paid off.
