Loans are the most sought-after manner of growing any financial base, from investing in businesses to long term investments such as homes, while also acting as the immediate solution to financial woes.
While most people view the world of borrowing and lending as one that is straightforward, the reality, however, is different. When you get a loan on your name, without understanding the terms and agreements involved, the necessity to fulfil them could end up ruining what you set out to do. This is why one needs to be careful and examine one’s own needs well before moving in to take a loan.
Here are a few habits that separate responsible, trustworthy borrowers from ones that could end up in financial ruin:
Borrow only if you absolutely have to
This would be the first and most crucial rule in taking loans; only do it if you absolutely have to. There are always downsides, risks and hazards attached to it. Evaluate them before heading in. Also, loans don’t necessarily always constitute the only solution to your financial woes. To liberate your money flow, try to look for alternative channels. Reduce overheads, try downsizing, and look for ways to raise your income.
The importance of cushion
Sparing yourself some cushion is an ideal thing to do in this circumstance. As a salaried individual, you must always have an emergency fund and a savings buffer. If you run a business, the amount you should spare will rely upon the measure of your business and your industry. Sparing enough to cover a half year of operational expense is perfect. This enables you to deal with some unexpected costs if they ever crop up.
Use a loan calculator
There are a lot of these digital tools out there, designed to help you measure the most accurate loan amount needed. Utilize them before heading in to borrow. They can enable you to perceive how much the credit will cost you, while also giving you an estimate of monthly installments and the overall repayment schedule. With this data, you’ll have a superior judgement of the amount you stand to obtain and pay off.
Calculate your debt-to-income ratio
Your debt-to-income ratio, also known as Debt Burden Ratio (DBR), indicates your level of indebtedness. It measures the percentage of your monthly income that goes towards your current monthly loan installments. The UAE Central Bank has placed a limit of 50 percent on DBR for individual borrowers in the country. This limit is taken into consideration by lenders when you approach them for a new loan. It makes sense to calculate your DBR to avoid over-leveraging yourself by taking on more debt than you can afford to repay.
Having taken a loan, always stick to your repayment schedule. Always repay on time. Having said this, if you ever face a situation where you’re unable to do this, make sure to alert your lender. Ensuring a good channel of communication with your lender is crucial. Apart from being the morally right thing to do, it protects you from accumulating further penalties and a damaged credit rating.
If you want to be a responsible borrower and are planning on applying for a loan, these simple principles can make a tremendous difference.