Every day, in every imaginable form of media, be it television, radio, print the banks and financial institutions are advertising about how easy it is for one to take a loan and get rid of all the miseries, while fullfilling your dream of owning or getting something. It may be a new car, a second car, a house, a second home, education, travel etc. It would seem that the financial institutions or banks literally want you to have the money and are desperate to see your dreams materialize.

If that was not enough, banks and financial institutions have started unsolicited proposals by email and on the mobile phone with the message that a loan worth so many lakhs has been pre-approved for you and all you have to do is just ask. "Just ask and ye shall receive."

That tells us at least one thing about the entire business of giving loans, that, it is highly profitable. And anything which is highly profitable has to have a scam going on. Now I am not saying that loans are scams but I am talking about a whole lot of fine print and misleading which comes in with every form of Loan.

Firstly the loan company will be trying to maximize their outgo, that is, they will try to give you as much loan as you may possibly agree to. There will be a lot of talk about how interest rates are only going to shoot up in the near future, the market crashing in a few months time and your need to have something other than what you are taking the loan for. It may be furnishing for the house, the higher end models for the car. You have to be careful here. Do not borrow more than you want, rather do not take more than you can afford to pay back every month. As far as possible do not take more than one loan at a time. Get rid of your earlier liability before you can take on the next one. too, the sale people will tell you about debt consolidation and other financial jargon. Don't fall for it. Take the shortest possible term for your loan. You will end up paying back much lesser as interest.

Bottomline is, that the banks will want you to take the maximum loan, more than one loan and want it back in the longest possible time. Exactly the opposite is beneficial to you.

Next is the rate of Interest. The rate of interest thrown at you is hardly ever the actual rate of interest. There may be administrative charge, processing charge etc. Find out in advance about them and add it to your loan amount. Essentially you are borrowing more than what you want, in other words you will get less than what you ask for since the bank will deduct it from the loan amount sanctioned. You will also be told about taking insurance cover which is a good idea for long term loans, but a waste for short term loans. Add the premium of your insurance cover to the loan amount. Yes, you have to pay it back. Most importanatly do not take the first rate offered to you, negotiate with the bank for lower rates. You have to haggle. Like the flea market vendors, banks start offering the loan at a much higher rate than they can settle onto. You have to haggle.

Most banks charge for prepayment. If you think your financial situation is going to improve after some time and you can pay the loan back earlier. Be ready to shell out some extra money. If the improvement in financial situation is imminent, decrease the loan term and rough it out for some time.

Another thing you got to decide is fixed or floating interest rate. These days even the most fixed rates are not actually fixed. Read the fine printand in all likelihood you will find that the interest rate is fixed only for a few years and the bank reserves the right to change the rate of interest charged after that period. Rest assured, the change will only be upwards. interest. In this case you have to time your loan to perfection. When the interest rate is low enough, you can go in for a fixed rate and don't bother if it goes down further. Market economics dictate that sooner or later the interest will go up. If the rate of interest is already high, it's better to wait out.

The option is to go for a floating rate of interest which is good in the short term but not good enough in case the market crashes. Converting from a fixed to floating rate and vice versa also calls for processing fees, so be wary of that when you are considering changing over.

Lastly when you have made up your mind to take a loan, take some interest in doing research. It will benefit you immensely. Compare the loans on offer by the various banks. And comparison does not mean only comparing interest rates. Do compare the features and while doing so be careful that you are comparing apples with apples and not oranges.

Only when you are very certain and have understood what you are getting into, sign on the dotted line for your loan.

Microsoft excel has a nifty feature that allows you to calculate the EMI for a given interest rate and loan perid for a given amount. It also allows you to calculate the actual rate of interest being charged by the bank.

You can check it out here:
http://www.xomba.com/how_calculate_emi_and_interest_rate_your_loan