It is now a
viable option to take a loan for important personal expenses like renovating
your house, taking a family vacation when everyone’s vacations are around the
same time. Being a salaried or fixed income professional can make cash flow a
hurdle when it comes to making plans like these and many people who know they
will be able to pay for expenses that they need to make urgently, over a
predetermined period of time.
Indeed,
financial responsibility is about prioritizing your expenses and utilizing your
funds to the best possible extent. It is not always necessary to have to the
funds for the investments that you need to make, if you know you have a steady
source of income and can afford to take a personal loan and pay it back.
However, this is
an oversimplification. Often times, institutions that provide personal loans
will only disburse them at an exorbitant interest rates that may seem like they
are low but thanks to a variety of in built charges that may not be apparent
when you avail the loan, you can end up paying back an amount that is much
higher than what you may have initially accounted for.
Suppose the
lender – let’s say a bank offers you a personal loan of Rs 300,000 at a flat
rate of 15 per cent for three years. You may be led to believe that interest
rates will rise further and agree to opt for a flat interest rate. Since you
will be paying an equated monthly instalment of around Rs 12,000, the principle
as well as interest should be reduce every month, but when you opt for a flat
interest rate, it ends up being the most expensive option.
On the contrary,
under the reducing balance method the principle gets reduced daily, monthly,
quarterly or yearly. As, the principle amount gets reduced, the interest that
you pay is on the reduced principle and therefore lower, as well. Hence, many
financial advisors recommend opting for a floating interest rate.
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