Debt Trap: Follow these simple steps to keep your EMIs in check

It is easy to get into a debt trap with banks tease customers with cheaper loan installments (EMIs).  Yes, loans do give a financial solution to your immediate problems or fund your vacation, but they may quickly turn into a liability greater than you imagine. 

Before you go out for getting a loan, it is utmost important for you to understand whether that loan actually necessary? 

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In today's world, where it is difficult to buy a car or house depending only on savings, getting a loan is the only option left. 

In fact, with rising education costs, you may want to fund your own education without depending on your parents’ savings, but at the end you end up taking an education loan.

But, how should you pay EMIs?

Speaking with Zeebiz, Navin Chandani, Chief Business Development Officer, BankBazaar.com, said, "As a thumb rule, all your EMIs put together – be they for personal loans, auto loan, credit cards, home loans, education loan – should not be more that 30% of your salary. 

"Around 40-50% of your income is not comfortable territory. Anything above that can be risky. So the first point to keep in mind while taking a loan is to not borrow more than what you cannot afford to repay."

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Further, even if you are thinking to get a loan, make sure that tenor is as small as possible. Why?

Chandani explained with an example. For instance, for a 10 year loan of Rs 30 lakh at 9.5, the EMI would be Rs 38,819 and interest you would end up repaying would be approx. Rs 16.6 lakh, which is around 55% of your loan amount. However, if the loan tenor was 20 years, the EMI would be 27,964 and the total interest paid would be Rs 37.1 lakh. 

So, for the same loan, a difference of 10 years means a difference of almost Rs 20 lakh in the amount to be repaid. Hence, choose for the right mix of EMI and tenor to get maximum benefits.

Loan checklist

First and foremost thing is to read all the terms and conditions of the loan. For example, some loans may come with a prepayment charge. Others may allow only certain fixed number of prepayments in a year or in the tenor. Yet others may not have any restrictions on prepayments. This factor can affect your repayment plans.

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So make sure you are clear about the terms and conditions before you sign the dotted line. Take help if you need or consult the bank. 

What next?

If you have already taken a loan, make sure that you make repayments on time. Because, poor repayment track record not only spoils your credit history, it also adds penalties and makes your loan more expensive. This is especially true in case of unsecured loans like credit cards, which charge up to 25-40% in case bills aren’t paid on schedule.

Moreover, always try to cover loan with an insurance. Buy a term plan of the same amount or higher to ensure that your family is not saddled with unaffordable debt if something happens to you, Chandani added. 

Hence, make sure you take a loan as per your requirement and not end yourself up in a debt trap.