Imagine that you are on the verge of an important financial decision. A loan can be a catalyst for realizing your dreams or a cause of financial distress. It is not desirable to have a solid financial plan before taking out a loan - it is simply necessary.

Credit: Your Financial Stimulus

Loans, if used wisely, will help you achieve your aspirations. Whether it's buying your dream home, expanding your business, or investing in your child's education, loans can open doors to new possibilities.

Let's take an example

Rajesh and Priya's dream was to own a house in Mumbai. They took a huge home loan without a clear financial plan. At first, everything seemed to be fine. However, the EMIs could not be paid as Priya had to take a break from work due to health issues. If they had made a financial plan, they could have gone ahead with the loan without putting themselves at risk and knowing exactly how much they could afford.

The importance of your financial health

Taking out a loan affects many aspects of your financial health. Let's understand in detail:

Cash outflows: Loans are monthly EMIs. It's not just a number - it's the money that goes out of your account every month. You should check if your budget can handle it without compromising on the essentials

Total Value: Your assets may initially depreciate due to liability. However, if you plan well, when you repay the loan and value your assets, your net worth will increase significantly.

Risk Factors: Life is unpredictable. The loan becomes a burden in such situations as loss of employment, health problems, or even death may occur. You need to be prepared for such situations.

Insurance Requirements: More debt often means more risk. It is advisable to consider additional insurance to cover the repayment of the loan in case of unforeseen events.

Let's take an example to understand this.

Anita took a business loan without a comprehensive plan to expand her boutique. It was difficult to repay due to the lockdown. With a financial plan, Anita could have set aside an emergency fund, which would help her get out of financial difficulties without affecting the business during tough times.

Smart Loan: Essentials

ഒരു ലോൺ എടുക്കാൻ തീരുമാനിക്കുന്നതിന് മുൻപ് ഈ ചോദ്യങ്ങൾ സ്വയം ചോദിക്കുക

Do I need this? Are you in need of a loan or can you wait a little longer? Sometimes, waiting can save you from financial stress.

Can I get it back? Look at your current and future income, expenses, and stability. Can you manage EMIs realistically?

Interest Rates and Terms: Ensure the best rates and terms. Understand the penalties for default on the entire cost of borrowing.

Term of the loan: Align the term of the loan with the life of the asset. Avoid extending loans into your retirement years when your income may be low.

Taking a loan is not a financial decision - it is a life decision. Make sure that integrating it into a comprehensive financial plan helps you financially rather than putting you in financial stress. A well-structured plan helps you understand your ability to repay, align the loan with your financial goals, and protect against unexpected risks.

Remember, a loan should be a step towards financial freedom, not a leap towards financial risk. Make sure it is in line with your financial plan. Only then can action be taken.