Home Loan

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Home Loan

“ A Wise Financial Decision or A Debt Trap "

Every person dream of having their own home at some point in their lives. Owning a home gives a person a sense of safety and stability, especially in a country like India where a person’s worth or social standing is sometimes also being judged by them owning a house. Dual income of both the spouses of younger generation couples which generates enough disposable income at a couple’s hands combined with easy credit availability also acts as a catalyst in deciding to purchase a home with the help of home loan.

Buying a house through home loan is a complete personal choice for an individual or couple, however it is always advisable to understand the Pros and Cons of availing home loan before taking that financial plunge. Let’s have a look into both Pros and Cons of availing home loan.

Pros of availing home loan

Capital appreciation

Buying a home can be counted as creating an asset which may appreciates in value over the time and generate handsome returns over the investment made in purchasing the asset.

Tax Benefits

Govt. of India also encourages purchasing of homes by offering tax deduction to the individuals availing the home loan, currently the exemption is applicable under two separate heads one is under repayment of interest amount which is exempted under Section 24(b) up to 2 Lacs per person per year and repayment of principal amount which is exempted under Section 80C up to 1.5 Lacs per person per year. These exemptions can be claimed by both the spouses separately if they are the joint holders of the property against which the exemptions are being claimed.

By availing these two exemptions a person or couple can reduce their taxable income to a great extent and save on the amount of tax paid by a substantive amount.

Forced Saving

Availing a home loan can be counted as a way of forced savings as it leaves less amount of disposable money at their pockets which forces a person to rationalize their expenditures accordingly.

A cost-effective way of availing credit

While home loans come with an interest rate which ranges currently between 8-12 percent in India depending upon the lender. It is cost effective when one compares home loan interest rates with Personal or Credit Card Loan interest rates.

Helps improves person’s credit score

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Availing a secured loan like home loan helps in improving healthy mix of credit in an individual’s credit portfolio which in turn helps in improving their future credit score and credit worthiness.

Cons of availing home loan

Long commitment

Home loans usually are of between 10 to 30 years of duration, which is a long period of time in a person’s career. A person needs to be in discipline and keep their discretionary expenses in check to be able to repay their regular monthly EMIs.

Lack of flexibility in relocating to new cities or places

Once a person buys a home they invest a huge sum of amount in it, which may act as an impediment to a person’s career if he or she needs to relocate to the other city for better opportunities in their career

Inflexibility in handling unplanned/unpleasant events in a person’s lives

Life can throw a curve ball in anyone’s direction at any time in their lives and home loans are of long duration, since a person has a commitment of paying fixed monthly EMIs against the availed home loan, he or she may not be able to handle these unexpected events due to lack of funds at their disposal

Loss of Investment Opportunity

This is one of the most overlooked disadvantages of home loan. When a person applies for a loan, irrespective of big or small the loan amount is or how long or short the duration is, as they continue to repay the amount, they lose the opportunity to invest the same amount in an investment tool that could yield valuable/more returns.

Conclusion

While buying a home through home loan is a major milestone in a person’s life. One should evaluate all the merits and demerits and leave the emotion out before arriving at any decision regarding buying a house through home loan.

Disclaimer

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. City Credit Management LLP is not liable for any decision arising out of the use of this information.

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