Have you ever asked yourself or any professional “Should I Take a Loan?“
Have you ever asked yourself that “Am I doing it Right” before swapping your credit card?
Have you ever told your wife “I don’t think we should buy this on Loan” while shopping for a Washing Machine or TV . If your answer is NO go ahead and read this article.
If you think loans are difficult to get believe me, creditors love giving loans. It is a big business after all. Be it the bank or a private financier, the interest they earn from your loans is what keeps them running. The more loans you take, the happier you are, but you are also making them profitable. And make no mistake about this either as long as you are in debt, you will never attain financial freedom.
Indians have just developed a tendency of getting into debt. The most common kind is credit card debt. The credit card was made to ease you to carry bundles of notes. But many of us use it as an EMI solution. This is simply; buy now and worry later philosophy. That is the easiest way of ruining your financial freedom. Credit cards should be used not as a source of credit, but just a convenience that saves you from having to carry cash. Spend only what you can pay off immediately or before the due date. The focus should be on retiring the balance that has accumulated on your card as soon as possible. At 30 per cent plus a year interest rate, this is the worst kind of debt possible. And that is the reason every bank or financier is behind you to take a credit card.
However not all debt is bad, there is good debt as well. Good debt is used to create productive and long-term assets or to increase one’s income-generating capabilities. So a home loan, loan to buy land, education loan and business loan to set up a business would fall under the ‘good debt’ category. Here maximum one can do is to evaluate and go for the option which is less costly. And cost is the interest charges that one pays. The simple way to evaluate is to compare the EMIs of different loan providers. Just remember that for comparison the loan amount and the tenure of repayments should be same. With the loan amount, also compare the processing fees. It ranges from 1% to 4%. This is also a part which can be negotiated.
Now days, debt repayment is basically your credit-character certificate. If you have chosen to take a debt, it is equally very important to repay in the disciplined manner. Any overdue, late charge penalty will spoil your ability to take further loans. The data of loaners is centralized by the CIBIL (Credit Information Bureau (INDIA) Limited) and before you apply for next loan or credit card the financier checks your responses to the loans taken earlier. Lot of times when one starts earning, people accumulate credit card overdue and this default keeps on reflecting in your CIBIL report. And than in your serious days, when you have actually made up your mind to buy a dream home or a car, the bank refuses to give you a loan until you clear your credit.
Debt is like Mount Everest, difficult to climb and even tougher to come back. While getting out of any debt is vitally important, it is even more important for bad debts. When one is servicing multiple loans, the costlier one should be settled sooner. So credit card dues should be paid first followed by personal loan, car loan and housing loan.
Another thing that should be kept in mind is the tax implication. Certain loans, a home loan, for example, would avail tax benefits for the principal paid under Section 80C and for the interest repayment under Sec 24 of the Income Tax Act. Hence, when faced with two loans, first settle the one which has higher interest rates and doesn’t provide any benefits.
Of course, the best way of avoiding debts is to not get into any. But modern lifestyle directs you towards it. While some loans might not be avoidable, a lot are. Use a strong justification while getting into more loans and always maintain a fact that you will not go overboard as more debt means more sacrifices in terms of money, in your present lifestyle.
It will be great if you can share your love & hate relationship with loans 🙂