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PERCIPIENCE FROM A REAL LIFE INCIDENT
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A THREAD
A THREAD
In 2016 I entered my first year of engineering at MITCOE. In the first week I saw many of my classmates and other students filling up forms for Student Loans. Walked up to one guy and asked him what it was. He replied this is a student loan form which we can opt for.
It covers fees for 4 years without any collateral because amount is below 4L. I nodded in agreement. Further questioned him why he was filling it up(financial issues/or some other),he replied.....
I am a young,independent,self-reliant and ambitious young 18 year old who understands his responsibilities and I do not wish to burden my parents with college expenses. I nodded in admiration.Further he mentions,his father has enough to pay double the fees.
But out of his own morals and ethics he wont take a penny from his father. All these comments really intrigued me then.I was awestruck with the confidence of a first year student who had such high self-belief.
4 years down the line,in 2020 we both got placed in different companies. I had 2 offers in hand,he had onehttps://abs.twimg.com/emoji/v2/... draggable="false" alt="😉" title="Zwinkerndes Gesicht" aria-label="Emoji: Zwinkerndes Gesicht">https://abs.twimg.com/emoji/v2/... draggable="false" alt="😜" title="Winking face with tongue" aria-label="Emoji: Winking face with tongue">He had an offer of 4L CTC/annum. Joining letter hasn& #39;t come yet and there is no scope it will come any sooner.
The tenure for education loan was 5 years. The average rate of interest is 12.00%,different banks have different rates,but the average is this. Banks don& #39;t ask you to repay the loan from the first year, you are given time to complete your graduation,secure a job and then pay up.
Now comes the catch,banks use Marginal Cost of funds based on Lending Rate(MCLR),plus an additional spread to set an interest rate. Presently the additional charge is anywhere around 1.5-3% range.
There are multiple bank charges like,processing fee,pre-payment fee,late-payment fee of EMI& #39;s. Processing fee looms around 0.1-0.2% of the loan amount.
Calculating a basic structure of payment, my friend will have to pay almost 9000 as EMI once the loan period starts. His principal amount would be 4L and the interest amount would be around 1,34,000. Add the extra charges that the bank levies and round the number upto 1,50,000.
My self-reliant,ambitious,independent friend earns 4L salary the first year which after deductions would be close to 30K/month in hand. Out of this he will be spending 30% on his loan repayment. Assume he spends another 30% on his living and food.
He is left with just 12K for entertainment,travel,savings. Taking into account appraisals at 5% highest in a service based company I dont see the structure shifting much,with promotions happening once in two years he would have spent a big chunk on loan repayment.
To conclude,he would have paid a staggering 37.5% of the principal amount as interest towards loan repayment. Here I have forgotten to add the simple interest he would have payed for the first year which is 48K. So,if you add the 1.5L+48K you get almost 50% as interest amounthttps://abs.twimg.com/emoji/v2/... draggable="false" alt="😲" title="Erstauntes Gesicht" aria-label="Emoji: Erstauntes Gesicht">https://abs.twimg.com/emoji/v2/... draggable="false" alt="😲" title="Erstauntes Gesicht" aria-label="Emoji: Erstauntes Gesicht">
The aim of this narrative was to understand the power of compounding and how loans destroy your finances. Debt is not always bad but debt invested in the right areas is good. Debt invested in depreciation will never give financial freedom.
I am not belittling his desire to be independent but the cost of desire is worth taking a jab at. Never take any financial decisions in the heat,think them through.
END OF THREAD!!!!
Cheers and thanks for readinghttps://abs.twimg.com/emoji/v2/... draggable="false" alt="☺️" title="Lächelndes Gesicht" aria-label="Emoji: Lächelndes Gesicht">
Cheers and thanks for reading
