Many people think they (and the industry tells them) that they are eligible for a “home loan”, car loan, personal loan, credit card loan etc. Actually this is not true.

Just imagine a banker wanting to lend you money so that YOU can buy what you want! From when did the banker get to be such a nice human being?

The loan is against the biggest asset that you have. What is the biggest asset that you have?

Your ABILITY TO EARN IN THE FUTURE.

You only get a loan against your Form 16, which means this is a loan against your future earning capacity.

Imagine telling a lender that you want only Rs. 25 Lakhs for a house costing Rs. 200 lakhs HOWEVER, you will not have any income in the future and you will sell some shares to repay the loan. The lender will baulk.

The loans that you are getting is strictly against your future earning capacity, NOT ON YOUR NET-WORTH, not on the cost of the asset that you are buying, not on the reputation of the builder, not on the reputation of the car manufacturer, …just on your future earning capacity!!

So let us call it a Form 16 Loan. And if inflation is likely to be at 13% for the next week, you can rest assured the lending rates now would be in the region of 15% per annum.

The rate of interest is a function of inflation (at lease when sensible people head RBI). So if you have a loan at a fixed rate, and you expect inflation to be much worse than it is now, rest assured the lender will pressurize you to shift to a floating rate.

Till then, what can we do?

Welcome inflation. Nothing else.

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  1. just a piece of trivia. the first guy to sell stuff to the masses on EMI basis was Singer of Singer sewing machines back in the 19th century. it was a success as industrialization had boosted workers incomes and instead of daily wages, biweekly or monthly wages were now common.

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