With a fall in interest rates, borrowing instruments are gaining popularity. The younger generation especially is relying on borrowing facilities such as credit card, personal loans etc to buy expensive gadgets like bikes, cars, smartphones etc. Whereas the older generation is borrowing funds to accomplish the fund shortages for unplanned buying. Borrowing is not a bad practice, but unplanned borrowing is not healthy for your personal finance.
When you borrow money, the equated monthly instalment is used to repay the outstanding amount along with the accrued interest. EMI size depends on how long you take to repay the money, longer tenure means more interest payment to the lending institution.
Building a corpus can help you achieve your short and long term financial goals. For example, Systematic investment plan (SIP) is a tool to grow your fund over a period of time by investing in mutual fund schemes. SIP helps you to earn a return on your fund to achieve your various financial objectives. Longer investment period can help you to build a bigger corpus.
How EMI can put pressure on your financial planning?
Loans give you the capacity to buy things that otherwise you cannot afford from your present income. The underlying concept thus is basically to use your future capacity to make things affordable today with the support of a loan instrument.
A loan should be used carefully based on need. A loan taken without due consideration could cause an imbalance between your income and expenses. You may have to compromise with some of your financial objectives to repay EMIs.
For example, your net income is Rs. 6 lakh p.a and you save Rs. 20,000 per month for objectives such as the education of your children, buying a home, vacation planning etc., after meeting all the regular expenses. A decision like taking a car loan without making any adjustment to your financial plan will put pressure on your future plans and you may find it difficult to achieve the stated objectives and goals which have higher priority.
How building corpus can help you achieve your financial objectives?
Planning for your future financial goals requires you to invest certain amount at regular intervals in selected investments tools like mutual funds. Your investment grows with time and helps you build a bigger corpus to achieve your financial objectives.
Suppose, you want to buy a car and you do not have sufficient money in hand, and you decide to invest in equity mutual fund through SIP for 3 years. After 3 years, you will be able to save money and get good returns on it. You can use the corpus to purchase the car from your own fund.
Corpus versus EMI
Let us find out which is better for you, corpus or EMI. Suppose, you want to buy a car worth Rs.5 lakhs and you don’t have money in hand for immediate purchase. You have two options, either to buy it on loan at 10.25% interest or to save money through SIP and build a corpus in next 36 months to buy it.
If the SIP gives a return of 14% per annum then you would need to deposit an installment of Rs. 11,275 per month to get a corpus of Rs.5 lakhs in 36 months.
|EMI Vs Corpus|
|Amount paid in 36 months|
|A||EMI on Rs 5 lakh loan||16,055||36||10.25||5,77,980|
|B||SIP to get a corpus of Rs.5 lakh||11,275||36||14||4,05,900|
( A – B)
It is clear from the example above that if you plan in advance or delay buying the car and invest money to build the requisite corpus then you can save a big amount in comparison to buying the product on loan.
It is better to exercise cautions as any kind of unplanned debt can do some serious damage to your personal finance. A well planned future corpus could be a better choice over EMI’s as it will not only keep your debt low but also help in improving your credit score.
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