There has been a considerable increase in equated monthly instalment purchases over the last few years. People are purchasing a house, gold, electronics, car and even travelling and educating their kids through loans. Banks and private institutions offer a loan for almost everything that you may need to buy.
While loans seem to be the logical route to live a life without waiting too long to save the funds to buy things; they are causing a lot of harm to your retirement savings.
Remember: No bank or private institution provides loans for retirement.
Hence, it is imperative that you structure the equated monthly instalments strategically. In India, the government offers tax benefits for education and housing loans. However, before rushing into a loan to avail these benefits the following aspects must be kept in mind:
- Loans only for necessities: Every individual has his/her own set of priorities. While some peg a lot of importance in having a home of their own; there are some who prioritise providing good education to their kids over everything else. Considering the real estate prices, taking a housing loan is essential to buy a home. Education is also becoming a costly affair with various international schools opening their doors to Indian students. This has given rise to the inherent need of an education loan.
The basic thing to be kept in mind is that loans should be taken only for things which are of importance to you to reduce losses paid as interest on these loans.
- Compare loans: This is not an easy task as people usually find difficulty in making sense out of the options available in the market. The only option that they usually look at is the EMI and they end up picking the loan with the lowest monthly instalment. This is a bad strategy because the lower the EMI – the more interest you end up paying on your loan.
For example, if you take a housing loan of 50,00,000 with an interest rate of 9% then the EMI options available would be:
- Tenure 20 years – EMI 44,986
- Tenure 30 years – EMI 40,231
If you were to pick the loan with the lower EMI, then you would opt for the loan with a tenure of 30 years. At the end of the tenure, you would end up paying 1,44,83,160 whereas in case of the loan for 20 years you would end up paying 1,07,96,640. Picking the higher EMI with a shorter tenure would ensure that you have 36,86,520 more in your savings by the time you retire.
This is a simple example to explain how paying less each month doesn’t help saving money when it comes to loans.
The bottom-line is that a loan is a necessary evil in today’s times hence it requires a calculated approach to ensure that it doesn’t eat into your retirement corpus. Also, part-prepayment of loans can ensure that you pay lesser interest. Always take advice or suggestions from a financial consultant before you pick up a loan to help you save without compromising on your lifestyle.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme related documents carefully.