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Seven borrowing rules for financial well-being

Naveen Kukreja
Loan tenure plays a major role in deciding your monthly EMI outgo. (Illustration: Rohnit Phore)

Loans are helpful in meeting crucial life goals at all life stages. Be it for arranging capital for your business, financing your dream home, child's education or for financing your luxuries and exigencies, loans allow you to make crucial decisions or indulgences without waiting to accumulate the required money for them.

Here are seven borrowing rules to ensure your long term financial health:

Compare offers of lenders
Before opting for any lender, it is important for you to conduct a thorough research and compare lenders across different parameters to avail the best deal. Do not base your decision just on the basis of the interest rate offered as several other factors, such as prepayment charges, processing fee, etc., too would determine your overall cost of the loan.

Choose your loan tenure
Loan tenure plays a major role in deciding your monthly EMI outgo. While lower loan tenure means higher EMI, it also leads to lower interest cost and vice versa. One should ideally decide loan tenure on the basis of repayment capacity and contribution required for other financial goals. Opt for a shorter tenure if you can comfortably repay your EMIs by the due date without sacrificing your contribution towards other financial goals.

Do not enquire multiple lenders
Every time you make a loan or credit card enquiry, lenders fetch your credit report to evaluate your creditworthiness. Such lender-initiated requests are treated as hard enquiries for which credit bureaus reduce your credit score by a few points. Hence, initiating multiple enquiries within a short time span will lead to faster reduction of your credit score.

Ensure timely repayment
Delays or defaults in making loan or credit card repayment not only attract fines and penal interest rates, they also negatively impact your credit score. Of all the factors considered by the credit bureaus in calculating your credit score, your repayment track record is widely believed to receive the maximum weightage. Any default or delay in making loan or credit card repayment is reported by the lenders to the bureaus, which then reduce your credit score accordingly.

Monitor guaranteed or co-signed loan account
Co-signing or guaranteeing a loan account makes you equally accountable for its timely repayments. Any defaults or delinquencies in such loan accounts will equally impact the credit score of the co-signor or guarantor. Hence, do not co-sign or guarantee loans unless you are sure of the repayment capacity and creditworthiness of the primary borrower. Once, you co-sign or become a guarantor of a loan, keep a close eye on it to ensure timely repayments.

Fetch your credit report at periodic intervals
Your credit report may contain incorrect information due to clerical errors made by the lender or credit bureaus. Fraudulent credit applications or transactions in your name may also make their way to your credit report. Such incorrect information emanating from clerical errors or frauds might have an adverse effect on your credit score. Fetching your credit report is the only way to detect such errors or frauds. Hence, fetch your free credit report from each of the four bureaus, at least once a year. Alternatively, visit online financial marketplaces to fetch free credit report and their monthly updates. Report the inaccuracies or false information, if any, in the credit report to the bureaus and the concerned lender for rectification. A rectified credit report will list a higher credit score.

Maintain an adequate emergency fund
An emergency fund helps in meeting your routine expenses in case of financial exigencies or sudden job loss. Ideally, this emergency fund should be at least six times of your mandatory monthly expenses including your insurance premiums, existing EMIs, children's education expenses, etc. An inadequate emergency fund may force you to default on your loan EMIs or redeem your investments meant for your crucial financial goals to ensure loan repayments. Hence, try to increase the size of your emergency fund by 5-6 times of your expected loan EMI as soon as you start planning a loan application.

The writer is CEO & co-founder, Paisabazaar.com