Borrow only for essentials

While certain purchases merit borrowings, for buying other goods, a loan is the last thing that should be on borrower’s mind. In this article we plan to discuss which loans come as a blessing and which one is merely a curse.

Until some years back, a loan was looked down upon as something one should take only in case of a dire need. Things have changed now and today, most of us are jumping onto the ‘loan’ bandwagon. ‘Buy all on EMI’ has indeed become the mantra of the new generation.

While taking a loan is not a bad thing to do, what the loan is being used for makes all the difference in making it good, bad or downright ugly. So, let’s get down to classifying borrowings and ascertain which ones will benefit one and those that will do more harm than good.

To begin with, one should only take a loan for things that will give one a ‘value addition’ over time and/or for assets that will appreciate. Broadly speaking, the following loans belong to the ‘good’ category:

Housing Loan In spite of interest rates rising on home loans, taking a loan might be the best idea while buying a house. Not only can one avail of tax benefits on the principal and interest amounts repaid on the loan but one will also build an asset over a period of time. However, one must take into account that these loans are generally spread over a long tenure and therefore, one should resort to careful planning before one take up this loan type.

Educational Loan With repayment on this loan commencing only after one complete borrower’s course and start earning, taking an education loan might make sense to pursue that degree. What’s more, even these loans are accompanied by tax benefits on interest repaid.
Before one takes on a loan, he should ask him self whether one really needs it. One must borrow only if it is a pressing need and not just a want. Here is a list of borrowings that one should take recourse to only when it is genuinely required.

Car Loan: When one takes a loan for buying a car, he is essentially investing in an asset that will only decline in value quickly. Moreover, auto loans attract hefty interest costs as well. Take this loan only if it is truly justified.

Personal loans have interest rates as high as 20 – 22 per cent. If it is an emergency need that one wants to tide over, one can consider taking this loan. However, think twice before one takes a loan for a foreign holiday, for buying the latest electronic gadgets or for things that are consumed quickly and do not derive any long term benefits.

Credit cards take the cake for this category. Swiping borrower’s card to buy his favorite brand of apparel or for dining out with friends may be the easiest thing to do, considering that one get a credit free period of as much as 30-50 days on the card. However, do keep in mind that credit cards attract very high interest rates on outstanding balances. The rates range between 25 to 30 per cent and if one fails to pay his existing card dues by the due date, he will not only have to cough up a high interest charge but also the interest clock on borrower’s fresh purchases starts ticking away from day one. This means that any fresh purchases made on the card will not get a credit free period.

Do a thorough “need analysis” the next time one wish to take a loan. Borrower’s decision to borrow should be based on various factors, the biggest being borrower’s needs as against borrower’s wants and borrower’s ability to make the repayments comfortably. Lastly, do a self-evaluation and borrow within ones means.