Let’s distinguish between the good loans which you should opt for & bad loans which you should avoid.
What is a Good Loan ?
A Loan that creates a productive asset or enhances your earning capacity is considered as a good loan. The loan should lead to a creation of an asset, and secondly the quantum of the loan should be within the repayment capacity of the borrower.
Home Loan : Home loan is a perfect example of a good loan. House is a revenue generating assets which also appreciates over a period of time. They are available generally at lower interest rates and also have added advantage of Tax deductions.
However some borrowers are tempted to prepay the loan when they receive some lump sum amounts, which is not always a good idea. Let me tell you why? The Interest portion on the long tenure loan in the initial years is very large compared to the principal repayment. Currently if you are paying an EMI of Rs. 20K after five years at an inflation rate of 7% the amount will be worth Rs 14K and secondly with increase of your income your EMI will be a smaller portion of your total income
Invest the lump sum available with you is a better yielding investment for fulfilling your another financial goal.
Vehicle / Auto Loan :
Unlike Property here the asset i.e the vehicle you buy depreciates in value. You should take the loan for a shorter duration say for 3 to 5 years not more than that. Try to negotiate the processing fees levied while taking the loan.
Loan against property
The purpose for which you have borrowed the Loan will decide whether the loan is a good or a bad. If the loan amount generates a better return and leads to a creation of an asset it can be termed as a good loan. Nevertheless it is a better option compared to a personal loan or a credit card loan which you should avoid in all circumstances.
Bank Overdraft against Fixed Deposit
If you need a loan for a shorter duration your Bank FD’s can help you out. The Bank will charge 1-2% extra for this facility and you need not break your FD before maturity secondly the interest will be charged on the amount you have actually withdraw.
Bank Overdraft against Fixed Deposit
If you need a loan for a shorter duration your Bank FD’s can help you out. The Bank will charge 1-2% extra for this facility and you need not break your FD before maturity secondly the interest will be charged on the amount you have actually withdraw.
Credit Card Loan
The Credit card loans are available fast and simple but they charge usually a very high rate of Interest. Make timely payments for your credit card and I would say just avoid taking a credit card loan.
Finally consider the following before taking a loan :
Good Loans increase the value of your assets
Compare the different options you have before finalising a loan
Compare the rate of different banks and also go through the terms and conditions of the loan
Don’t borrow to invest in the stock market
Instead of taking loans for fulfilling your desires, plan systematically to achieve your goal on time.
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