Borrowing Money for Big Purchases? Here’s How You Can Plan for It

You make a small purchase through a credit card EMI facility or opt for a small amount of instant loan, and then before you know it, you are drowning in debt. But why you should not carry such debts? This article enumerates 7 reasons why you should not borrow money and instead invest wisely for your financial goals.

1. You spend more on credit:

Most frequent borrowers agree that they keep buying products and services to get instant gratification. When you spend on credit, the money doesn't go out of your pocket instantly. Furthermore, the sellers and lenders make the purchase look affordable by showing you the monthly amount you will pay over the period. However, the same people will mostly avoid spending on the same products and services if they have to make those purchases in cash. This is because buying on credit creates a feeling of getting the product/service without the pain of parting with money.

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2. You pay interest:

When you borrow money, you pay interest on the borrowed sum. The higher the interest rate, the more the loan will cost. Similarly, the longer the loan tenure, the more the loan will cost. Depending upon the loan amount, interest rate, and loan tenure, you end up paying much more than what you borrowed.

Suppose you are buying a car worth Rs 12 lakhs. Since you can make a down payment of Rs 2 lakhs, you take a home loan of Rs 10 lakhs for 7 years tenure at the interest rate of 8% p.a. In this case, your monthly EMI will be Rs 15,586. While the EMI may look affordable, your total interest outgo comes to Rs 3,09,242, and the total payable amount goes to Rs 13,09,242 (apart from the down payment and processing fee).

Similarly, for a personal loan of Rs 5 lakhs for 5 years tenure at the interest rate of 16% p.a., a monthly EMI will come to Rs 12,159, which seems quite affordable. However, you end up repaying Rs 7,29,542.

While there are options like No Cost EMIs, it is necessary to check the hidden terms & conditions and charges like processing fee, prepayment fee (in case you want to prepay the loan in future), etc. You see, such loans can make you binge-borrow for every item in your wish list, which can create a challenging situation of debt overhang.

3. You borrow from your future income:

Just as when you take an advance salary, when you take a loan, you borrow from your future income. You get instant gratification or an emotional high when you buy the product/service, but you have to pay for it for a long time. Since the loan EMIs become your fixed monthly expenses, it is like borrowing money from your future that you hope to earn. People mostly regret buying things on credit that do not provide value when they actually pay for them.

Besides, during such uncertain economic times, your income can fluctuate considerably. If you do not afford the repayments in the future and default on loans or make delayed repayments, your credit score can get negatively impacted.

4. You may not reach your financial goals:

Most of us have several financial goals, such as a child's higher education, buying a dream house, a cosy retirement, a yearly international vacation, and many more. In order to achieve these goals, it is important to start investing towards them wisely from an early age.

However, if you have a huge debt burden and pay high EMIs, it will restrict you from saving a sufficient amount every month for your financial goals. Besides, the debt burden can keep increasing if you are not financially disciplined, and you might never be able to achieve your goals with a huge debt burden.

5. Debt can create severe stress:

Having substantial debt can create stress and lead to severe health conditions like anxiety and depression. People with high amounts of debt constantly struggle with their finances. The high level of stress, higher blood pressure, and overall worse physical health and wellness can result in debt depression or chronic stress.

6. Debt can affect your credit score:

Not paying your dues on time can lead to debt accumulation. When you are under a debt burden and facing a cash crunch, taking an additional loan to meet your living requirements could be viable, but this can put you in a debt trap and significantly lower your credit score.

A general thumb rule is that your total EMIs should not be more than 40% of your net income. A debt-to-income ratio above 60% to 70% indicates that you could fall into a debt trap. Moreover, it can negatively impact your credit score. Hence, in such situations, you should avoid taking any further loans. To live a stress-free life, ensure your loan-to-income ratio is always maintained.

7. Debt can ruin your personal relations:

Huge debt can put unnecessary pressure on the household finances by creating a lack of financial security for your family members. During a heated argument, the partners can argue about each other's spending habits and who is creating more debt. Such arguments related to finances can even break marriages.

Now that you know why you should not borrow money let us see how you can achieve your financial goals without creating a huge debt burden:

While being debt-free gives a sense of good financial health, it is not necessary to be completely debt-free. Some loans like home loans and education loans help you achieve your goals faster and manage your finances better. While you may not be able to avoid certain loans, you can choose to borrow a lower amount and reduce your debt burden. Robust financial planning can help you achieve your goals within your expected time horizon while reducing your debt burden.

Let us continue with the above-discussed example of a car loan. Now, suppose instead of making a down payment of Rs 2 lakhs, you make a down payment of Rs 6 lakhs and reduce your loan tenure by 4 years, i.e. your loan tenure will be 3 years. In this case, your monthly EMI will be Rs 18,802, and the total interest outgo will be Rs 76,865; therefore, the total amount payable goes to Rs 6,76,865.

So, by paying an extra down payment of Rs 4 lakhs and reducing the loan tenure by 4 years, you can save Rs 2,32,377.

But how can you make the higher down payment? Well, instead of paying a huge amount on interest, it is advisable to consider postponing your purchase and making a robust financial plan to achieve your goals.

While you can invest in traditional fixed-income generating financial instruments like bank fixed deposits, recurring deposits, bonds, etc., they may not generate inflation-adjusted returns. But, investing in mutual funds through a mix of lump sum and SIP modes of investment can help you accumulate the required sum of money over the time available.

You can use your existing investments made in bank fixed deposits, savings accounts, recurring deposits, bonds, debentures, etc., to make a lump sum investment in mutual funds. However, make sure you do not liquidate investments made for other financial goals.

For the remaining sum of money, an SIP route of mutual fund investment is suggested to steadily build a corpus over time and yield inflation-beating returns. You can use online tools like SIP calculators that are easily available on several financial websites. It can assist you in determining the exact investment amount required to achieve your envisioned goals.

PersonalFN's SMART Fund Explorer can help you plan your mutual fund investments smartly with a mix of lump sum and SIP investments. You can simply provide details like the type of goal (such as retirement and buying a house), time to a goal (in years), the amount needed in today's terms, lump sum investment, and SIP investment.

Considering the details entered,  PersonalFN's SMART Fund explorer will provide you with a decent expected rate of return on the investments and the value of an investment at the target date. As you scroll down, the explorer will offer you two mutual fund investment options (A and B) that you can choose based on your risk appetite. Furthermore, you can also get instant access to the list of the best suitable mutual fund schemes as per your selected plan by enrolling on  PersonalFN's SMART Fund Explorer.

So, in our example, you can postpone your car purchase by 3 years (Considering the 8% inflation rate, you will need Rs 15,11,654 for the down payment after 3 years), and from the amount, you had kept aside for the down payment, make a lump sum investment in mutual funds of Rs 2 lakhs. Apart from the lump sum investment, you should also invest through the SIP mode that benefits you with the power of compounding and rupee cost averaging. Suppose you afford to invest Rs 28,000 p.m. in mutual funds via SIP. With this, you will be able to save Rs 2,32,377 on the car loan interest.

If you are ready to wait more, it also makes sense to postpone your car purchase by 5 years (Considering the 8% inflation rate, you will need Rs 17,63,194 for the down payment after 5 years), make a lump sum investment of Rs 2,00,000, and start an SIP of Rs 15,000 p.m. This way, you will not spend any money on interest and will achieve your financial goal of owning a car without financial help.

After enrolling on   PersonalFN's SMART Fund explorer, considering the potential returns and your risk profile, you can choose the suitable investment plan and take a crucial step forward towards achieving your goals.

Warm Regards,
Ketki Jadhav
Content Writer