Feeling stressed? Well, it could be because you still haven’t paid back your home loan! Yes, loans and other sources of debt are one of the biggest causes of stress these days.

More and more people dive into a loan without thinking if they can afford to pay it back, and that too without reading the finer print. Read our tips on how to understand the fine print before saying “aye” to any type of loan.

1. Ask yourself these questions.

– Do you have the ability to pay it back?

– Do you really need a loan? Don’t just borrow because you suddenly feel like  taking a family trip to Europe or splurging on that 52-inch plasma television!

2. Low interest rate: it’s just an illusion!

This one’s a well-known fact. It’s also well-known that paying the credit card dues in installments, results in interest rates of 36 per cent or more per year!

The next most expensive type of loan are personal loans offered by banks, non-banking financial organisations (NBFCs) and credit card companies.

This is followed by cheaper loans on collaterals like shares and mutual funds, and lastly the loan against property and against your life insurance policy, which are by far the cheapest options.

3. Are you ‘leveraging’ it?

This means using your existing asset like property, shares etc as collateral to raise a loan. If you are using this money to make more money, then it’s a good idea, given that you know how to manage the difference between the interest rates that you are earning versus the interest rate on the loan. Leveraging is good. But it can be quite risky depending on what you plan to do with the money, raised.

4. Tenure of repayment
Here’s one basic rule: the shorter the tenure, the higher the outgoing installment. If you don’t like this statement, think again. Do not shy away from shorter tenure loans simply because the installment is high. If you can absorb a higher installment it might be a very good idea. Here is the opposite view: the longer the tenure, smaller the installment. But you pay much more as interest.

5. Processing fee
This is the icing on the cake for the lender. As most people borrow because they need the money desperately, their need is exploited by charging a high upfront processing fee. This can be around 2% plus service tax, which again has to be paid by you. However, note that this is often negotiable (though you will never be openly told so).

6. Service tax on interest
Now, here’s something that might shock you: for instance if you are told that your installment is say Rs. 5,469, each month you may be charged say, Rs. 500 or so, extra! The bank will tell you this goes towards service tax and is charged on the interest part of the EMI.

Remember to check the figures VERY carefully, as some lenders give you an all-inclusive EMI, while others may not talk about it at all. In effect, it makes the latter’s loan sound cheaper and competitive, but you will be bearing the extra cost.

7. Prepayment penalty
What if you have arranged some money and wish to repay the loan earlier? While this can be done the charges can be heartbreaking, as high as 5-7%. Though may also be negotiable so bargain hard and it’s quite likely that you will get a cheaper deal. But do not forget to find out about this charge in advance while going for a loan.

8. Operational aspect of the loan
You cannot afford to miss this one! Are you expected to pay using a credit cards, bank debit card or cheques? Well, either way, even if you forget your wife’s birthday, DO NOT forget your payment due dates!

You could be hit really hard especially if you choose to pay through credit cards. If your EMI is due and billed to you via a credit card and you forget to pay, this can really cost you dearly. Loans are an expensive proposition in the first place but defaulting on the credit card also means that you will have to pay the EMI plus the 36% per annum on the credit card outstanding. Remember, if you miss, they hit, and hit hard!

9. Prepayment schedule
Chalking out a repayment schedule, is a MUST, especially if you take multiple loans. Decide if you are going to keep the loan for its full tenure or pay it faster, and how you plan to go about doing this. In the case of more than one loan:

– The most expensive ones should go first.
– You should know which one to prepay and also the when and how of it.
– Also, inform your spouse or the one who is going to manage your affairs, in case of a temporary, long-term or unfortunate permanent absence by you.