Managing loans is one of the most important parts of personal finance. Today, most of us have at least one active loan—this could be a home loan, education loan, car loan, credit card bills, or even money borrowed for buying gadgets.
The challenge is that many people don’t clearly understand what counts as borrowing and how it affects their budget. Most think only bank or NBFC loans are “real loans,” but indirect borrowings (like credit card dues or EMIs on purchases) are also loans. Before borrowing, it’s important to know how loans work, how much you can afford, and the difference between good loans (that help you build assets) and bad loans (that only fund luxuries).
Common Mistakes People Make with Loans
Based on our analysis, these are the top mistakes that often lead to repayment difficulties:
- Borrowing more than what is actually required or affordable.
- Using loan money for non-essential expenses.
- Taking loans for luxury desires like foreign trips, high-end cars, or gadgets.
- Poor budget planning and lack of financial discipline.
- Choosing loans with very high interest rates.
The Nupen Assets team studied these problems in detail and created a step-by-step roadmap for effective loan management—covering how much to borrow, when to borrow, and how to use it wisely. This blog gives a broad overview detailed guidance for each loan type will be covered in future posts.
Golden Rule of Loan Repayment
Your total EMIs (all loans combined) should never exceed 50% of your monthly take-home income.
If you are already close to this limit, avoid taking any new loans. Sticking to this rule will keep your finances stress-free.
Home and Home Loan
Before taking a home loan, first decide the right budget for your house. A safe estimate is 5 times your annual income.
- Example: If your annual income is ₹12 lakh, you can plan for a home worth ₹60–65 lakh.
- At least 40% of this amount should be self-funded (your own contribution). The remaining can be taken as a loan at the lowest available interest rate.
- For example, if you take a loan of ₹40 lakh for 20 years at 7.25%, your EMI will be around ₹31,000.
Car and Car Loan
The ideal budget for a car is up to your annual take-home salary.
- Example: If your monthly salary is ₹1 lakh, you can plan for a car worth up to ₹12 lakh.
- You should contribute 40–50% as down payment (₹5–6 lakh in this example).
- The rest can be financed through a loan. For instance, a ₹6 lakh loan for 5 years at 8% interest will have an EMI of around ₹12,500.
Education Loan
Unlike home or car loans, education loans don’t follow fixed rules. They depend on:
- Duration of the course or degree.
- Future career scope for at least 10–12 years after the course.
- Risks from new technologies like AI that may affect job opportunities.
- Expected starting salary and long-term growth potential.
Always evaluate these factors before committing to an education loan.
Loan Repayment Strategy
Paying loans early saves both time and money. But which loan should you pay first?
- Always start with high-interest loans (like credit card dues or personal loans).
- For a home loan, try to pay one extra EMI or 10% of annual repayment every year.
- Example: For a ₹40 lakh home loan at 7% for 20 years, this strategy can cut almost 3 years off your tenure and save you about ₹5.5 lakh in interest.
Final Thoughts
Loan management is not “one-size-fits-all.” The right strategy depends on your income, lifestyle, and financial goals. At Nupen Assets, we provide customized solutions to help you manage debt effectively.
You can reach us through email, WhatsApp, or phone—details are available on our website: www.nupen.in.
Upcoming Blogs
- How to borrow an interest-free car loan
- How to plan your retirement
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