How many times have you found yourself wondering if you should get a loan for a purchase? Or tempted to buy a phone which is out of your budget, but has an affordable EMI scheme? Or are you scared of debt altogether?

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The continually changing banking industry has made financing easier, quicker, and more convenient. The technological support today enables us to skip the piles of paperwork and get a loan with the click of a mouse.

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While it is a great step ahead for the world, the easy banking system also means easy money—even when you don’t have any. This may sound comforting initially, but what many don’t realize is its impact on your future finances.

Taking a loan comes in handy when you’re making big purchases, but that doesn’t mean you punch in all you wish to, deferring all payments. It may seem easy now, but in the future, you will regret it.

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It is the months that follow that face the brunt of the purchases you didn’t think through. Let me show you a picture of what happens AFTER you’ve taken a loan.

As soon as you receive your monthly income in your bank, a substantial chunk of that would go into repaying the loans with EMIs (Equal Monthly Installments). If EMIs take the most of your income, you may have to sacrifice your lifestyle choices, savings, and even retirement planning for that matter.

With the ease of accessibility to loaned finances, one tends to spend more than their means. This leads to a major personal finance crisis where you are stuck chasing EMIs, left with hardly anything at the end of the month. That means your mind will know no peace… even with all pleasures of comfort and luxury around you—because they are all borrowed!

So, does that mean loans are a strict no-no? Of course not!

Loans are not always bad… but they need to be planned well. They work best when you’re borrowing to start a business or taking a student loan. It can be beneficial to put in borrowed money there—paying affordable interest.

Whether loans are beneficial or not depends on various factors and the amount, interest rates, and the installments are one factor. To decide on it, all the terms and conditions of the said loan need to be considered.

Here is how you can borrow and yet not cripple under the pressure of debt.

Don’t borrow more than 20-25% of your means. This would ensure your EMIs are not sucking away all your income. You can then strategically divide your income into expenses, debt repayment, and savings .

Ensure timely and regular payments. Discipline is key to a good loan experience. Every borrower has a credit score which is calculated based on your repayment. Regular repayment keeps this score in check. It also saves you from humongous charges and interests on non-payment or late payment.

• Never borrow to invest. If you want to invest in the market, on a property, it is senseless to borrow and invest. That would mean creating a liability to build an asset. None of the risk-free instruments like FDs and RDs can fetch you a return high enough to pay for that interest. And the instruments that do pay higher are volatile.
• Read all documents carefully. Stand clear on every single term even if it means spending hours going through a pile of contracts. Going through it is paramount to avoid any unpleasant surprises.
• Be careful not to get into a debt trap. If EMIs get too much for you, you may end up borrowing a second loan to repay the first one. If this cycle starts, it may never stop. So make sure to plan the use of funds, the repayment, and the adjustments.
• Weigh the pros and cons of loaning the amount, and of the purpose you wish to borrow it for.
• Let’s say, you own a decently working phone, for which you have no complaints… but you want another higher-end phone for the features – which may not even be useful for you. Would your loan be worth it then?
• On the other hand, if you wish to pursue a course that would fetch you a better working profile and you need a student loan for that, it would make sense.

The last word:

Reportedly, the youth is less scared of credit today. The elder population still stays averse to credit. While it may seem the youth today is bolder, it also seems they don’t look into the future and defer all their challenges for later. Borrowing can work wonders if planned well. So think through, and ask yourself as many questions as you want to clear your head.