Loans are often considered harmful to one’s economic well -being, mainly due to the burden of paying interest on borrowed capital, which often affects one’s financial plan. Therefore, most experts advise on choosing a loan to buy expensive assets and suggest collecting the required money before making such a purchase. When such advice may be appropriate when it comes to purchasing that are classified as “desires”, items which are classified as “requirements”, it is often difficult to avoid taking advantage of the loan. Home buying is a classic example – many people who come with home ownership value security and stability, often don’t mind getting a loan to buy a home. However, this does not relieve the pain of paying interest in the tenure of the loan, which is often very long in the case of a home loan.
For example, if you take a loan of Rs 20 lakh in 20 years at an interest rate of 9% PA, the total interest amount you pay during the 20 -year period will in fact more than the amount you borrowed. The following chart shows the main payment and interest payment break on such a loan.
(The author of the article Nilesh D Naik is the head of investment products, Sher.Market (PhoneP Wealth))
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