Sukanya Kumar, Founder & Director, RetailLending.com | Aug 12, 2016, 10.28 AM | Source: Moneycontrol.com
The more we become ‘social’, the more we tend to show-off. It leads to more bad loans. It is time to shun bad loans and embrace good loans wherever required.
This is a very sensitive subject. Most of us in the financial broking business will shiver thinking what will happen, if this ever comes to of no one borrowing anymore. But let us overcome this superficial personal gain agenda and see what lies beneath.
A man in his late 20-s or early 30-s is bound to have a couple of small loans like credit cards, personal loans etc. here and there. They may be for shorter periods. As he progresses well in life and gains stability in his profession, he wants to settle himself. A big part of this ‘settlement’ is buying a home. And a home loan is generally taken for 20 years by most.
Given the current property prices across the world, buying a home with your own savings and liquidating your financial papers is not a possibility. You are bound to fall short way beyond the market price. Gone are those days when a man used to build a home with his retirement benefits and borrowing only from his provident fund account. He never used to enjoy the home fully as he has spent his hay-days staying at a rental home/company accommodation which never was his ‘own’.
The more we become ‘social’, the more we tend to show-off. If my colleague has got something which he boasts about, we have to get the better ones to overtake him. Our home-maker (to the true sense) spouse wants to buy a home with more number of bedrooms and amenities, her neighbouring friend could afford. Even our teenage children want to buy better gadgets to make sure they have their friends’ groups flocking around them and think they have the ‘latest’ ones.
There is no end to these needs, no end to loaning to purchase these, and hence the terms ‘financial slavery’. A man pays 70% of his net take home salary to pay off his monthly loan EMI-s and needs to survive with the balance 30% only, and with this lean sum pay for his home rent, children’s education and their extra-curricular activities, day-to-day expenses, food, clothing, entertainment, hobbies and also family trips and shopping.
We are afraid to start our own venture; afraid to opt for a better opportunity, if it requires us to take a study-break for a couple of months, we are even afraid to get married these days (I hear it from many 30-somethings frequently), since we are afraid to take more responsibility, given that we are already under so much debt.
Now, all of it is not that bad. There are two clear groups of loans. The good loans and the bad loans. One needs to let go of the bad loans to relieve himself / herself from being miserable, and continue happily with the good loans and feel good to have them.
Any item, bought with loan-money, which depreciates in time, is a bad loan. You never recover the sum you paid, plus you pay the interest on that sum too.
For example, you buy clothes or any electronic gadgets via a consumer durable loan or you buy a car with a car loan, or you buy just some books by swiping your credit card…….. The moment you are walking out of the shop, it depreciates by 30-50% to the least. It becomes a ‘second hand’ item. You never regain the price, unless of course your car becomes a vintage one and pays off (pun intended).
So, a loan on credit card, a personal loan, a consumer durable loan, a car loan- all these are bad loans. It only boosts your ego and gifts you a ‘rich’ lifestyle and only brings momentary joy with no permanent effect on yourself.
A loan which enhances the worth of the purchased product over time and even crosses the mark of it, to give a handsome return over the period, also absorbing the interest cost attached to it.
A home and an education loan are in this category. A home always appreciates in price, if bought wisely with proper research in good location, and will supersede the interest cost too. The percentage of people making a true loss while selling their property is negligible.
The added advantage of taking a home loan is also the tax benefit you get under a couple of sections. There are subsidies available on affordable housing too.
An education loan while taken will be with a moratorium so that it is easy on the pocket of the student. This loan enriches you as a person and helps you get a well-paid job or find a business solution for yourself, after getting trained professionally. The return on this is lifelong. You keep reaping the benefit of you educating yourself, till your last day. The interest you pay while taking this loan is negligible, of course.
Strangely enough, the bad loans are the ones which are more expensive too!
So, to avoid enslaving yourself from paying high monthly debts, please relieve yourself of the high-interest rate loans which are eating away your month’s pay and giving no returns other than being depreciated day by day.
One last thing, many people feel themselves under a ‘burden’ of home loan and tends to close that first. Do not make that mistake ever. If you have spare money, invest in retirement plans, SIP and other low-risk debt-funds to reap the benefit when you are old and retired. By foreclosing your home loan early with the liquid cash and hence not having any money left for investment anywhere, will leave you only with a house post-retirement with no money in hand. And, you can’t eat, enjoy and spend the house for next 20-25 years of your retired life. You need money for that.
Be wise. Live a life without any bad loans. No loans at all may not be financially a good choice for the modern generation, since you want to enjoy yourself when you are young. Ultimately, we live longer now than earlier with all the medial attention we get these days.
Happy Good Loaning! Happy Freedom from Bad Loans!!