The problem with EMI—we live and breathe EMI

Being able to purchase things on EMI has made our lives apparently easy. With almost everything from cars, appliances to groceries being available on EMI it seems a handy tool to meet everyday needs. But when we give our lives over to EMIs it can become a destructive force that wreaks havoc with our lives, burns us and makes us lose our peace of mind.

Not all loans and ensuing EMIs are bad but they have the potential to wreak finances, ruin credit scores and wipe out savings. Not to mention the sheer number of additional problems if you lose the security of a cozy job as well.

A loan can help us build toward an asset. And in those cases comes as a blessing. But most people typically pay EMIs on gadgets, appliances, cars and what not all of which are depreciating assets that lose their value as time goes on.

A loan towards depreciating assets is going to laden you with financial burdens that won’t go away easy.

Even loans take towards building assets can turn sour. If you build a house for 4 that’s an asset. A big luxurious house on the other hand is a liability. A house in a area that is difficult to get sold is a liability.

EMI affordability and loan affordability are two different things. If the total amount is something you can’t afford then that becomes a liability and EMIs by their very nature are deceptive. They make this task akin to eating an elephant- in small bites. If on a salary of 60k, you take a 20lakh home loan for 30 years, at the end of the tenure you’d have paid 40 lakh in interest. The EMI only comes to be 20k. The construction completes in 1 to 1 and a half year and you don’t have to pay rent and it seems like a saving.

What happens if the salary goes even lower?

At 20 to 25k the EMI is 50% of your salary of say 50000?

What happens if you lose that job or have some financial emergencies that need a lot of money.

When you consider a loan, you should be able to figure in its long-term viability and not just the short-term undertaking. The EMI amount might be affordable for a few years but not in its entirety. Life being life, miscellaneous not thought of expenses rule the roost.

The future calls for an increasingly high expense- kids, home repairs, education, marriage, health and so on. Income might rise or might go down but so do expenses.

Coupled with that on a 20 lakh home-loan where you give away 40 lakhs as interest could have been your savings all of which is lost.

Also don’t take huge loans for things that will depreciate. While a car is a necessity in today’s world, there’s no reason to take a 10 lakh car loan. It’s an object that depreciates in value over time. A 3 to 4 lakh vehicle is what’s best.

It gives you the comfort of a ride while not overly stretching your budget too thin and makes you prepared for any eventualities that may unfold.

If you stretch the tenure of your EMI say from 25 years to 30 you’re paying less in terms of monthly payments but are increasing interest payments and bringing the total to a bigger unmanageable amount. In order to get a certain comfort now you’re sacrificing future comfort.

This ensures your finances stay stressed for a longer duration. Save money wherever you can.

The right thing to do with a loan is pay it off as early as you can. Don’t think of extending tenures unless you’ve no way out. Astute financial planning begins with trying to live within your means. As the popular saying goes, “jitni chadar utne hi pair failana”.

If you don’t start planning finances at some point things will spin out of control and you’d have no option but to limit expenses and start living way below your means or die of shame.