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How to be a smart borrower

By Rajiv Raj
November 23, 2015 13:48 IST
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Let not the smartness be confined only to your phone... Transfer it to borrowing too! Here's how

Borrowing whether in the form of loans or credit card swiping lets you have temporary access to funds which are not yours at a cost so that you can use them to fulfill your needs or desires. Borrowing is always done within an understanding that the borrower will repay the borrowed amount at agreed conditions. As a borrower you have to abide by certain conditions and rules and have certain obligations that need to be fulfilled; these are pretty standard but you could follow a few tips and be a smart borrower.

Borrow only what you can repay

Though borrowing is fairly simple these days; getting a loan is not tough if you meet the eligibility criteria. Personal loan can be taken for miscellaneous reasons and the purpose is not asked; if one has a credit card then you can spend till you exhaust your credit limit. One must be careful especially during festival times when sellers offer discounts and special deals.

Whether you are buying the latest smart phone in EMI or splurging on a designer watch with your credit card; borrow only what you know you can repay.

In case of a home loan also make sure you check what your EMI would be and then plan accordingly. Make use of the EMI calculator available online to carefully plan your repayment plan. If possible rethink your borrowing and look for alternatives.

Concentrate on your CIBIL Score

 Your CIBIL score is an important factor when applying for a loan. Acceptance of your loan application depends on a healthy CIBIL score; if the CIBIL score is low then improving it can take time. So get a credit report from CIBIL at least a few months ahead of your borrowing plan.

Sort out any issues in your Credit Information Report (CIR) that are affecting the score negatively and if required take some steps to improve it.

A low credit utilisation ratio for the next few months, no missed payments, getting an NOC for an old loan or paying off any pending credit card dues are a few simple ways that can help in improving your CIBIL score.

A good CIBIL score can help you in negotiating better rates and more favourable terms. A good CIBIL score comes in handy in all types of loans

Plan ahead

A home loan is big ticket borrowing; if one intends to borrow for buying a house, then careful planning should begin well in advance. One aspect that needs attention is the CIBIL score; this has been covered above. Apart from that aspects like planning your finances, getting your financial statements in order, reducing your overall debt burden are important.

Paying off smaller loans helps if you are planning to borrow a big amount as it helps in better planning of your monthly outflows. Getting a reserve in place or saving to make a down payment should also be planned ahead. Always keep a reserve; do not put in everything while making a down payment.

Compare, compare, compare!

Actually this is self explanatory but I would still talk a little about.  Comparison should not be made only on the basis of interest rates but other factors like processing fees, pre-payment clause and conditions, other miscellaneous fees, loan terms, interest rate whether fixed or floating.

Often while comparing you may just concentrate on the interest and forget to look at the other aspects which are equally important. There is a lot of information available online; make use of that to borrow on conditions that suit your financial plans in terms of duration etc.

Keep a lookout for options

Whether it's before borrowing or after one has already taken a loan, keep an open mind. If you are planning on taking a personal loan or a vehicle loan then do look at other options of borrowing; in case of a home loan the amount is usually too high so other options might not work. Consider borrowing again fixed deposits, PPF account or investments or taking a gold loan etc.

Obviously you need to compare the terms before making a choice. After borrowing also if you feel that a loan is available at a cheaper rate then at what you borrowed you could consider balance transfer.

Unlike a few decades back, borrowing is not uncommon or the last resort one opts for. However the onus of being smart about our borrowing lies on our shoulders. So let not the smartness be confined to the phone only…. Transfer it to borrowing too!

Photograph: Jin/Creative Commons

The author is a credit expert with 10 years of experience in personal finance and consumer banking industry and another 7 years in credit bureau sector. Rajiv was instrumental in setting up India's first credit bureau, Credit Information Bureau (India) Limited (CIBIL). He has also worked with Citibank, Canara Bank, HDFC Bank, IDBI Bank and Experian in various capacities.

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Rajiv Raj