There’s a loan available for almost anything today. You can avail a loan to purchase your dream home or car or white goods. You can even use a loan to go on a vacation.
The “attractive feature” of all these loans is that you repay them in relatively small Equated Monthly Installments or EMI.
But think again.
Suppose you were to take a home loan of Rs 50 lakh at 10% for 15 years, you would have to pay an EMI of Rs 53,730.
Put the numbers into any online EMI calculator and you will realize that you are repaying Rs 96.7 lakh for a loan of Rs 50 lakh.
Your interest component amounts to almost as much as your loan!!
So, the next question: Is there some way to reduce this huge cost of your loan?
The simple answer is: start a Systematic Investment Plan (SIP).
Let’s say you take a home loan of Rs. 25 lakhs to buy your dream home. The interest rate is fixed at 9% p.a. for a tenure of 20 years and the monthly instalment comes to approximately Rs. 22,500. The total amount that you will have to pay over the next 20 years works out to 54 lakhs, of which the total interest amounts to 29 lakhs.
Now if you can spare 0.1% of the amount of your housing loan, i.e. a negligible amount of Rs 2,500, and invest it in an equity fund through the SIP route every month, let’s look at what happens...
Over a period of 20 years, you will contribute a total of Rs 6 lakh to the equity fund. Assuming it delivers a rate of return of 15%, your total holdings in this investment will be worth ~Rs 37.43 lakh at the end of the 20-year period.
Some well-meaning advice:
1. While paying your EMIs on a housing loan, stretch yourself a little and put 0.1% of the loan amount into an equity SIP and stay invested for the entire term of the housing loan. It could go a long way towards reducing or even eliminating the sizeable interest burden on the loan.
2. Try increasing the SIP amount as your salary increases, you can enjoy the benefits of the power of compounding, which will help make your dreams into a reality. As they say, “Failing to plan is planning to fail”.
3. In case you still prefer to take loans and pay EMIs, then make sure that you are not paying more than 40% of your take-home income towards your combined EMIs for various loans.
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Disclaimer:
We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.
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