A Beginner's Guide To Borrowing

Taking a loan isn’t ideal. How to do it if you must

- Gaurav Mashruwala

THE SECRET TO FINANCIAL bliss is limiting our borrowings and fulfilling our needs and responsibilities within our means. Consider a home loan or borrowing for sudden medical expenses versus using a credit card to pay off a shopping binge. The first two are ‘good’ debts as they help secure our future. The last one is a ‘bad’ debt because it eats into our unearned future income. Smart borrowers avoid such debt. Here’s everything you need to know before you decide to take a loan.

 Different ways to borrow Borrowings could be either in the form of a loan or an overdraft. In case of a loan, interest is charged on the total amount borrowed for a specific time period. If we have borrowed ₹25,000 for one year, interest is charged on the entire amount for the whole year. 

Borrowing on a credit card is an overdraft. Suppose our credit card statement reflects a total spending of ₹25,000. We decide to pay ₹10,000 immediately and the balance later. The credit card company will charge an interest only on the remaining sum until the entire amount is paid off. Meanwhile, the interest for any other purchases during this period will get added to the pending interest. Therefore, in an overdraft the interest is charged on the outstanding balance for the number of days you take to pay off the money.

While borrowing, clarity on whether it is a loan, an overdraft or a hybrid product (such as home loans that are a combination of a loan and an overdraft) is essential.

Is your loan secured or unsecured?