Loans! Are these good 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?
Same way the consumer in modern day society is perplexed – Are loans good or bad?
Through this article I am attempting to make an analysis of this dilemma.
Ideally loans that create a productive asset or enhance earning capacity can be classified as good. Also loan taken to meet unexpected emergencies do not need a classification. They are a “must” rather than being good or bad.
Thus, the purpose of the loan plays a crucial role in deciding whether a loan is “good” or “bad”. The other deciding factor is the cost of the loan. The purpose of loan must also be cost effective. 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.
So the purpose of the loan (and its cost) and the interest rate of the loan defines the hierarchy of “good” loans or “bad” loans.
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.
The consumerism boom fuelled by the presence of modern places of worship – Malls, has led to the phenomenal growth of plastic money. Swipe…swipe…swipe is the new mantra chanted by one and all. And the prasad of this mantra is debt…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.
Even when you take loans, remember there are two types of loans – secured and unsecured. As the name implies secured has some collateral to secure the credit whereas unsecured doesn’t, so obviously it comes at a higher price. So when taking a loan is an absolute must then try for secured loan rather than unsecured loan.
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. The choice is in yours.
I hope you have got your answer!