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(Serious) Words of Wisdom : "The stock market is a giant distraction from the business of investing." ~ John Bogle

Top Ten Tips to Becoming a Smart Borrower

Nowadays, loans are both affordable and easily available. Moreover, markets offer infinite opportunities to splurge upon. So borrowing is on the rise. But we need to be careful.

Remember that there is no free lunch. In this age of information overload, alluring advertisements and unbridled consumerism, it is easy to get bedazzled and baffled. Therefore, it calls for our ingenuity and intelligence not to be lured and make the best possible choice.

Not all loans are good. Unsecured loans – such as credit cards, personal loans – finance consumption and are usually very expensive. They must be shunned at all costs. Loans that build assets – such as home loans, educations loans – are worth exploring. However caution is advised as banks may not always be giving the correct picture.

Do a detailed market survey of the various lenders and the interest rates that they offer. But beware of the interest rate jargon. Don’t be misled by banking terminology (for example flat interest rates may appear to be cheaper but are in fact the most expensive – a 8% flat rate would effectively cost around 15%.) Therefore, choose the daily/monthly reducing balance option rather than the half-yearly/annually reducing option.

Three. Another concept – advance EMIs – misleads many borrowers. Using this concept the lenders are able to quote lower interest rates. But again the effective interest cost works out much higher. Therefore, it is prudent to go in for a plain vanilla loan rather than the exotic variations. Interest-free loans or other such offers are too good to be true and thus should be viewed with suspicion.

Every rupee you borrow could hurt your finances. So be a smart borrower.

Four. Apart from interest, there are other costs to be paid such as administrative fees, processing charges etc. These costs could make your loan more expensive even though the interest rate may be lower. So don't forget to account for these too when doing your analysis.

Five. Sometimes the EMIs may work out more than what you can afford. These can be reduced by increasing the loan tenure (or, of course, by reducing the loan amount) to make it convenient for you to service the loan. But note that the total interest amount that you pay over the loan tenure will be higher.

Six. Make sure that all verbal discussions or offers are supported by relevant papers. Do not go by anyone’s words. What ultimately matters is the written word.

Seven. Do not give any false information. Sometimes you may be coaxed into declaring something that may not be the truth. This amounts to fraud and could land you in serious trouble.

Eight. Ideally, you should ask for minimum penalty (preferably zero) for pre-payments. This is more relevant to a longer-term loan like home loan which runs for 10-15 years. This will leave you with a choice to prepay your loans in future and save on interest cost.

Nine. Recheck all terms and conditions before you finally sign the documents. Ensure that the interest rate, loan amount, tenure etc. are as per the agreed figures.

Ten. Do not sign any blank documents or leave any blank spaces in the loan documents. Even if you have to spend a few hours to fill-up the form in full, do so. Do not leave anything for the lender or his agent to fill-up.

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