GOOD LOAN VS BAD LOANS
Types Of Loans - Good Loans Or Bad Loans
Everybody knows that debts or loans generally Come with inherent risk and additional costcosts to your monthly budget. They can be in the form of a home loan, education loan, credit card, or EMIs; debts are unavoidable in certain circumstances. When it comes to personal finances, it may not be possible to avoid liability altogether. But it is always possible to plan it cautiously.
The first question that should come into your mind before deciding to opt for a loan is whether it is a good or bad loan. Just as we separate the whites from the dark clothes to preserve the color while washing, similarly, to deal with your debt better, we will begin by distinguishing between good and bad loans. Now, everyone knows a loan comes with an additional obligation to your monthly budget and must be paid back. So how can it be good?
A GOOD LOAN
A good loan is more like an investment to improve your financial position. That means a loan will be considered as a 'good' loan if it increases your Personal Capital in the long run by either growing in value or by helping you generate income. These are generally low-cost debris that can be repaid in affordable installments.
Some examples of good loans
An education loan is like investing in oneself. First of all, it will improve your employability and pave the way for a well-paying career, ensuring that you will have a source of income to provide for your needs. Secondly, interest rates are generally very low for such loans and the loans are to be repaid in very affordable installments after you complete your education. Also, there are certain income tax benefits associated with the repayment of an education loan.
Home loans are again one of the cheapest kinds of loans available in the market. A home loan helps you acquire an asset whose value generally appreciates with time and it will save you rental expenditures, thereby reducing your monthly spending. The repayment is usually spread over a considerable period, like twenty years, and repayment of a home loan also comes with income tax benefits.
A small business loan can also be considered as a 'good' loan if you are confident that it holds financial benefits in the future. The interest charged might be a little high on them, but your business's future profits may ultimately help to boost your Personal Capital in the long run. While planning your personal finances, if you option a good loan, don't forget to evaluate the risks associated with it. For instance, when you take an education loan, the loan doesn't guarantee you a stable and well-paying job. Or, when you take a home loan, there will be additional expenditures
like municipal taxes and insurance.
Some examples of bad loans:
Credit card loans, generally, are not considered loans high-interest good loan as they have very high interest rates. They are also accompanied by very high maintenance costs. Apart from the associated costs, very often credit cards encourage nonessential purchases and increase your debt. So if you have a credit card, you need to manage it wisely.
I completely understand that, in the twenty-first century, one car might be an absolute necessity and you can't always rely on cabs or public transport but taking a loan to buy a second car …. really? It is a costly affair to buy one, and as soon as you move about out of the showroom, it loses at least 20% of its value. And by the time the loan is paid off completely, the cost of the car turns very high while the value it may provide will be way too little
Let's talk some numbers:
Suppose you buy a car for *5 lakhs without taking any loans and you are expecting to use it for five years.
Now, say you run it for 1,00,000 km, the cost of petrol is 780 per litre liter, and the car can run for 20 km per liter of petrol. Let us say that you need a driver 100, costing 710,000 per month. Let's list the expenses over five years: The total cost of owning a car comes to 214 lakhs, ignoring servicing costs, other mandatory maintenance costs, interest costs, and insurance premiums.
If you just took a cab, it costs a maximum of 212 per km and would cost 212 lakhs for five years in the above example. And this facility comes with the additional benefit of not worrying about parking or running out of petrol. Do consider this before buying a second car.
Other LoansToday, loans can be taken for almost everything-mobile phones, laptops, home appliances, jewelry or even a luxurious holiday. You simply have to repay the money in EMIs. You need to be aware that all these easy loans are just marketing schemes to expand the customer base so that the products are not limited to the super-rich. The plans often sound very attractive and pocket-friendly, but the retail stores, as well as the banking partners, tend to make huge money out of these through interest costs, additional charges, and processing fees. These types
of loans just promote consumption in society.
You should always remember that the person selling you a loan doesn't have your best interests at heart.
They are trying to pitch it to you just to meet their targets. Once you agree to the debt, you will end
up with months of your salary tied up in EMIs.
1. Ask yourself if you really need that loan.
2. Check the interest rate--it should not be very
3. Revisit the repayment terms--the installments
should be affordable.
4. Review your ability to pay back the loan. Make
provisions for contingencies.
S. Try to make the down payment as high as
possible. This will reduce the interest cost on the
will further deteriorate because of the amount you spend on shopping for the trip and on the trip. The interest rates on bad loans are generally high, and by the time you finish repaying the loan, the value of the commodity is often reduced by more than 50%. Thus, invest in buying True Assets, not liabilities. Tanya and Khushi opted for an educational loan-a good choice to make.
HOW DOES EMISis WORK?
In India, household debt has been rising at a tremendous rate in the last few decades. One of the
primary reasons behind it is the facility of paying vi more. EMIs, or Equated Monthly Instalments, have
made even expensive products accessible to all. You Can buy any product of your choice and pay for it
in small monthly installments/Buying an iPhone lo? 780,000 may seem very expensive, but buying it for
71,500 per month seems affordable and practical. A small amount gets deducted from your account every
month, and thus you don't feel like a hole has been burnt in your pockets. So EMIs provide a way where
you can live beyond your means at the expense of spending your future earnings. As soon as you buy
a product on EMI, you are bound to set aside a part of your future earnings for repayment of the debt. It
might be uncertain whether you will get that salary, but the application of it is pre-decided.
Nowadays we find that retailers offer 'no-cost' EMIs on almost all products. But are they really 'no cost'? Are retailers so desperate to sell their products that they would give them away at no interest cost? Isn't this like a free lunch? Let us unfold this mystery. How do retailers actually make money on such offers? When we talk about no-cost EMI, the interest component of the loan is often camouflaged in the form of processing fees and other charges. Sometimes, While opting for no-cost EMIs, you are actually deprived of certain discounts that would have been
available if you had paid the whole amount upfront. These constitute the cost of your debt.
Now while shopping online, you may see the 'no-Cost EMIs available' message next to the product.
Such options are made available by the platforms to increase their volumes. So if the discount offered on
the product remains the same, irrespective of the payment option you choose, you are actually not
paying any additional cost. However, the monthly installment will still be a part of your fixed monthly
obligation, and you will have to budget it accordingly. In reality, EMIs can act as a chain tying you to
an undesirable situation. The interest accrues every month, and you need to repay the installment. I
have many friends who are stuck with a job they don't like, just because they have to keep paying
their EMIs. Because of the burden of EMIs, they just can't afford to lose their jobs. Thus, it becomes
vital for you to analyze your existing situation and opt for a loan only if you can really afford it.
1) principles5 principle of Personal Finance:- CLICK HERE
2) Incomplete Truth of Personal Finance:- CLICK HERE
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