The interest rates have reached rock bottom levels and probably everyone you know is taking a loan. The fed has also made it clear that the interest rates will continue to be at such low levels for some time in future. Hence you are all tempted to take a loan to buy that dream house or car. At the outset yes it does look like the perfect time to take a loan but we would still advice you to ask yourself few questions before taking the plunge.

First of all ask yourself why you need the loan and whether you really need to take a loan. What is the purpose behind taking the loan. Is it to buy that dream house that you always wanted or that dream car.  If yes should I take a loan or I can finance with my savings which given the current low interest rate regime is anyways not earning much. We suggest that you clearly demarcate between necessity and luxury. If you want to take a loan for something that you categorize as luxury like say an exotic holiday then think again about it. We don’t think it is advisable to take a loan for luxuries in the current situation of financial turmoil.

The second factor to consider is whether you can afford the loan. Please understand that this is not a grant that you don’t

have to payback. Loan is a financial obligation which needs to be paid back on a monthly basis in the form of easy monthly installments also called EMI. Banks or financial institutions will leave no stone unturned to collect the money lent out to you. In the current situation of financial turmoil it is very important to evaluate your job security and savings before taking the loan to make sure that you have the financial ability to meet the monthly obligation.

Thirdly understand the terms and conditions of the loans. Please read the blueprint properly to ensure that there are no hidden charges. Check out whether there is a fee applicable for the early repayment of loan. And the most important factor understand about the interest charges applicable. Check whether the interest rate to be levied is a fixed rate or flexible rate.

In loan with fixed interest rate the rate of interest is fixed for the tenure of the loan irrespective of what the discount rate or benchmark rate is. In a flexible interest rate regime the interest rate is tied to some benchmark rate and with increase in benchmark rate interest rate also increase. In the current low interest rate regime most banks are offering loans on flexible rate and hence when the Fed rate increases the interest rate on the loan will also increase. If you are getting a loan on fixed rate then go ahead and grab it. However if it is on a flexible interest rate then take into consideration the fact that interest rates will increase in the future. The loan repayment has a long term horizon of say 10 to 15 years and the current super low interest rates cannot of course continue for so long. Once the economy recovers the interest rate will definitely be increased.

We firmly believe that all these points should be well thought of before taking a loan. But in the end it is you who has to make a decision. After taking all these factors into consideration if you feel that the loan is justified then go ahead and take the best deal available.