Want to borrow money? Smart tips you need to know to get the best personal loan, home loan
If the stocks you buy decline, you not only suffer a capital loss, but also end up paying interest on the margin. The dreaded margin call from the broker will force you to exit at a loss. ET Wealth has consistently warned investors that borrowing to invest is not a prudent strategy.
It is especially risky when you are buying volatile assets that can fall in value. Even buying a second house with borrowed money may not be a good idea. The House Price Index of the RBI shows that home prices in many cities across India have registered a CAGR of less than 6% in the past 10 years.
In other words, buyers may have paid 7-8% on a loan to purchase an asset that rose 5-6% in value.
Our cover story looks at smart ways to borrow and offers tips to those planning to take a loan. We also tell you about the tricks that lenders use to lure customers.
Look behind the rate offered
One common trick is pitching the flat rate of interest. You will be told that the lender will charge a flat rate of 9% on the loan amount.
This is a flawed calculation, because every EMI reduces the principal outstanding. The correct calculation would be on the reducing balance. If the loan is for three years, a flat rate of 9% effectively works out to 16.3% on a reducing rate of interest.
Here again, a borrower should look at the calculation used for reducing balance. A daily reducing balance rate will be higher, but works out to be a better option (see column on page 4).
Then there is another hidden cost in the form of processing fee. This is usually 1-2% of the loan amount, but capped at around Rs.1,000.
