Taking a loan is often considered detrimental to one’s financial well-being, primarily due to the burden of paying interest on the borrowed capital, which often impacts one’s financial plan. Most experts, therefore, advise against opting for a loan to buy an expensive asset and rather suggest accumulating the money needed before making such a purchase. While such advice might be appropriate when it comes to purchases that are classified as “wants”, for things that are classified as “needs”, it’s often difficult to avoid availing a loan. A house purchase is a classic example – many people who value the security and stability that comes with owning a house often do not mind availing a loan to buy a house. However, this doesn’t take away the pain of making interest payments over the tenure of the loan, which often tends to be quite long in case of a home loan.
For example, if you take a loan of ₹20 lakhs over 20 years at an interest rate of 9% p.a., the total interest amount that you will end up paying over a 20 year period will in fact be higher than the amount you borrowed. The chart below shows the break up of the principal repayment and interest payment on such a loan.
(Author of the article Nilesh D Naik is Head of Investment Products, Share.Market (PhonePe Wealth))
