FINANCIAL PLANNING: Don't borrow in haste to repent later

A loan is a commitment to pay back the same in a specified time period, along with the due interest. Any default can hurt your overall financial well-being. Hence, before opting for a loan, you need to be clear about why you are taking it. Because if it is not handled properly it could derail your finances.

It is fine if the loan is to fund the right purchase. But therein lies the challenge-how to decide what is necessary and what is not. People often succumb to their emotions and cannot control their expenses, some of which may not be needed. Usually, the conflict revolves around not understanding the difference between wants and needs. The Equated Monthly Installment (EMI) culture has made it worse. Today, loans are available at a click of a button and for almost everything you buy, even for items priced as low as Rs 10,000.

Whether you are buying online or at stores, there are always offers to convert your purchase in to EMI. Even if you can't afford to fund a product outright, thanks to EMIs you are led into believing that you can afford it. You begin to think you can manage a loan because the proposed EMIs are manageable. But actually it is not so. The point is not to check whether you can manage your EMIs or not, but to check whether you are making the right decision. Ask yourself whether you can afford the product you are buying on loan.

To avoid this trap you need to be aware of what are you spending on or investing for. For example, buying a house in India is a big step and usually costs a bomb. Almost everyone ends up taking a home loan to fund that purchase. So, if your decision of buying a home is based on your financial planning, then taking a loan is not an issue because it is for a necessity. It is also creating an asset, apart from the fact that the same purchase couldn't be made otherwise.

The same logic applies to buying a vehicle, which these days cannot be avoided. Again, taking a loan to make your life easy is a need.

These are the two main reasons people mostly take loans for. There could be a problem if the objective is not to buy a house or a car for use, but more to satisfy the urge of having a bigger house or a car than required.

If it is neither a necessity nor an emergency, then delaying your expenses or investments (on loans) is advisable. In fact, you could opt for a used car or a budget car with basic features and save money, which can be further invested to earn returns.

I am not saying that one should not aim for a luxury car or a villa. But make sure you are financially strong and then buy them.

A worse thing for your finances is buying mobile phones, TVs and apparel on EMIs. That should be a strict no-no. For example, a mobile which costs Rs 60,000-70,000 looks affordable with an EMI of say, Rs 3,000-4,000. But it's a trap that makes you feel that you can afford something.

Do a simple calculation every time you want to buy something. Say you want to buy a mobile costing Rs 70,000. Do you have Rs 7 lakh ready cash, apart from other investments? Unless you have excess cash and purchasing power, don't resort to this type of funded shopping. Take loans only for important things. It's ironical that people first take loans and then worry about how to repay them. The whole life then revolves around paying off the same.

The writer is chief gardener at Money Plant Consultancy