Follow loan hierarchy to balance portfolio

The modern day consumer is in a perplexed state owning to the multiple loans he has to service for fulfilling his various needs wants.

So are these loans bad or bad?
Loans probably being my middle name, this question coming from me may surprise many as I have been advising consumers on various facets of loans for many years on a day-to-day basis. Here I would like to draw a parallel from Bollywood movie Dayawan where film ends with a question by child character was Dayawan (the protagonist who plays a mafia don with a heart of gold) a good person or a bad person?

So it depends on your perception.

They are good if you are able to manage and balance your,loan,portfolio, besides having a good repayment capacity. But it becomes a messy affair if they are not managed well or your repayment capacity takes a beating.

Ideally loans should be a means of creating  assets or enhancing earning capacity. Then they are also a means to attend to unexpected emergencies. They are a must whatever situation you are in but the purpose of the loan plays a crucial deciding factor. The other deciding factor is the cost of the loan. The purpose of loan must also be cost effective. As you need loan to fulfill the need for more than one asset at a time, it is very important to priorities your loans.

If you are undertaking hair cutting course for Rs. 20 Lacs, it may not be worthwhile, as the earning capacity may not be enhanced that much. Even when the loan is for a good purpose say paying the fee for an educational course that will substantially add to the earning capacity but if the cost of the loan is too high, then it will not remain a good loan.

At the top of the hierarchy most loans taken to fund education for self or a family member would normally qualify to be a good loan as they create substantial earning capacity relative to their cost and are normally available at a reasonable interest cost. Tax breaks on the interest would also reduce the post tax of the loan substantially.

Second would be loan taken to fund a reasonable cost house for your own residence. Normally this asset price appreciates in value and will also act as a source of pension income or retirement through the medium of a reverse mortgage. Third would be a loan taken to buy your own reasonably priced vehicle (two-wheeler or four-wheeler). This may result in a boost in your productivity given that public transport in most cities in India is quite poor.

Then there are loans taken for consumption such as for funding or an expensive/ luxury consumer durable.
Basically there are two types of loans – Secured loans are loans such as home loan and vehicle loans. They are backed by your assets in order to minimise the risk assumed by the lender. The assets may be forfeited in case there is a failure to make the necessary payments.

Whereas unsecured loans are personal loans and credit cards where the lender has no entitlement to any of the borrower’s assets in case borrowers fail to repay the loan. Such a loan normally carries a higher interest rate than a secured loan. Repayment plans of loans vary based on each type of loans. Home loan repayment plans can be as high as 20 years or more, whereas vehicle loans can be repaid in 3, 5 or 10 years and the credit period for credit cards is around 50 days.

The consumerism boom fuelled by the presence of modern places of worship Malls, has led to the phenomenal growth of plastic money. Swipe is the new mantra chanted by one and all. And the prasad of this mantra is debt and more debt. The debt on the credit card for longer duration will land you in a financial mess. The borrowing on credit card should not exceed 30-45 days as interest charged is very high on such credit.
Last would be loan taken for speculative purpose such as investments in stock markets. These are strict No-No.

I would like to quote Benjamin Franklin here: Remember credit is real money which we tend to forget.
Thus it is important that you make it your personal goal to pay your credit on time as it will impact your credit rating.

So to end remember loans can be very useful nay essential to improve the quality of your life and your future generations. At the same time it has the potential to destroy your life if used unwisely.

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