Giving loans is a lucrative business. Business of banks and financial institutions rely on people taking loans and then repaying it, thus giving them profits. Many have built a fortune based upon giving loans. Loans also serve an important function for the economy by being a facilitator to businesses, housing, automobiles and other elements of consumption.
However, what is good for financial institutions may not necessarily be good for you, especially when it comes to loans. While some loans (e.g. business loan) may be good loans and help you prosper, there are several others which may derail your financial plans, if any! Taking loans can also lead to compounding work against you – a situation which anyone with long term financial goals would like to avoid
(Lot of the below is based upon Indian context. However, variants of this will be applicable to many places across the world)
1. Credit card debt
Credit card defaults cost a lot in terms of interest payments – which are typically in range of 2-3 % per month, and can even be worse. How much can it cost you annually? – Do the math!
2. Personal loan
Personal loans typically carry an interest rate of upwards of 10 percent per annum. And they are usually packaged so well that they seem irresistible. However, the fact that you are taking personal loan is usually an indication of the fact that you haven’t managed your finances well enough to have buffer money when needed. There can be several reasons for taking personal loans like medical emergency, wedding expenses, foreign holidays, home repair, speculating in stock markets or derivatives etc. Which of them are not worth it? – figure out!
3. Consumer Loan
Consumer loans also fall in too attractive to resist category. It is not uncommon to see youngsters, who just joined their first job, getting an expensive phone (worth 3 times their monthly salary) and then paying EMIs over next few months. Few months down the line they may go for another gadget and so on. The vicious cycle continues till realization happens. this is not limited just to youngster thought. The problem with this, like personal loans, is that you are paying usually upwards of 10% per annum as rate of interest and spending money on something that you could have done without, and is probably losing value every moment.
4. Payday loan
Ran out of salary by 25th of the month and wondering how will you survive the next week or so? Don’t worry, there are payday loans. Payday loans seem to be recent fad, catering in to people who tend to run out of salary before end of the month. Like personal loans, the issue with them is that in addition to paying a high interest rate, it is symptomatic of the fact that you are unable to control your expenses.
5. Gold Loan
Unlike unsecured loans like personal loans, gold loans takes gold or gold jewelry as a collateral. While it is often taken due to some financial need, one should probably also think of what use an asset like gold is if you can’t sell it during emergency & need to use it as a collateral for loan. One reason could be emotional attachment of gold and gold jewelry. Anything else?
6. Vehicle Loan
While in some cases you may need a vehicle (2 or 3 wheeler) and may really be short of money. But often vehicle loans, especially car loans are a result of desire to upgrade your lifestyle and not having enough means to pay upfront for it. And the “upgraded” car you are using is losing its value continuously, in case you think of it as an asset.
While there may be instances where you may genuinely be in need of money and don’t have any at your disposal, usually the fact that you are taking any of the above loans is an indication of you not living within your means and getting into debt trap to fund lifestyle. If uncontrolled, this can be a never ending spiral.
What would you rather choose – gratification by means of availing different loans you are eligible for and spend a chunk of your life paying EMIs?
Avoiding loans, investing diligently (and hopefully wisely) and trying to achieve financially independence?