How Can Home Loan Borrowers Avoid Falling Into The Debt Trap
If not for housing finance, most homebuyers wouldn’t be able to purchase a property in their 20s or even 30s. What makes borrowing even more lucrative is that the borrower gets tax benefits on the principal as well as interest components. Interest rates on homes are also comparatively much lower than other types of loans. To enjoy all the benefits of this financial tool though, borrowers must follow certain rules so that they don’t fall into a debt trap in the future owing to financial mismanagement.
Short tenure loans are not ideal
Short tenure loans are used by those who perceive debt as a necessary evil because they would like to get rid of the burden as fast as they can. With this strategy however, EMIs and general expenses eat into a large part of their monthly income, leaving little scope for savings. This is a sure-shot way to fall into a debt trap while trying to get rid of one.
Since you are taking the loan at a crucial age ─ borrowers who are in their 20s and 30s, will see their responsibilities growing in the future with marriage and growing family. The loan repayment tenure should be such that one is able to save money in another instrument that could be used for emergency requirements.
Over-borrowing is equally bad
There are borrowers who find it convenient to borrow as much as they can because debt is not something that worries them. They would borrow 90 per cent of the capital and use only 10 per cent from their pocket because the bank is willing to grant the loans. This is another way of embracing a debt trap.
Every time the economy goes into doldrums, major corporations cut down their staff to maintain profits or cut losses. It will be difficult for a loan borrower to repay if he is employed at a company, which is forced to adopt the extreme measure of job cuts. Keeping that in mind, the buyer should try to keep the debt amount as less as possible. Taking loans from family and friends to make the upfront payment, would be a good idea to keep the loan liability with the bank lower.