Hyderabad: Arjun, 35 years, married with two children, bought a house two years ago and earning a decent Rs 1 lakh per month in a noted company in the city. All was going smooth and stable for him till he had to pay Rs. 40,000 monthly for a home loan, Rs. 15,000 for a car loan, besides some personal and gold loans. As he took more loans, his monthly income is going all towards instalments. All of a sudden, Arjun began struggling for money to meet monthly expenses. His ability to make investments eroded totally. As he failed in timely repayments, pressure mounted from loan providers.
Like Arjun, many earners are getting caught in such financial crises from which they are not having any idea to come out. All this is because they are taking each and every loan that is offered. Ignoring the basic principle of spending in accordance with earnings is the root cause of all these avoidable problems. Whatever, the current trend is to spend future income today itself. Once a financial plan goes awry, it is very difficult to come on track again.
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Taking a loan is easy but, before that, we need to get prepared to make little sacrifices. One should strike a balance between expenditure and income from salary, dividends, interest and other sources. Needs, desires and luxuries must be differentiated. We should postpone our desires. Luxuries above one's financial capability would lead to a debt trap. Before taking a loan, a thorough check on previous loans and commitments should be there. High-interest loans above 10 per cent are a huge burden in long term.
One should accept the truth if they have unbearable loans already on hand. First priority should be to increase surplus, which means reducing expenses in order to gain the ability to pay timely instalments. A clear understanding of how much you can withdraw from bank deposits, equities, mutual funds and loans are given to others, is necessary. An action plan is needed to repay a loan before taking it. Loans above 10 per cent interest should be repaid on a priority basis. If you have a surplus, EMIs should be enhanced in order to pay off the loan as early as possible. In unforeseen situations, low-value assets may be sold out. If there is no loan, one can leisurely focus on long-term investments.
Loans should not be taken just because somebody is giving. It should be based on your income and limits on loan repayments. These precautions are a must. Home loan instalments should not go above 40 per cent of your financial capability. The credit card should not be used above 12 per cent of your limit. Car loans should not have more than five per cent. Personal loans should constitute less than two per cent of your income. Good loans create assets, but they turn into bad loans if spent beyond our needs. Mostly, the surplus should be used for investments, but some are taking loans out of the hope to earn a good income. Some are even taking personal loans for this. Even if one invests well by taking high-interest loans, they would not get positive results.
