Saturday, June 20, 2009

GOOD LOAN V/S BAD LOAN

Loan or credit , in India was regarded as not such a good thing to have by our forefathers. They always believed in living within their means .Taking credit or loan for them was a bad thing , something ,which they resisted at all times. However, things have changed over last generation and today, credit is not considered such a bad thing , anymore. In fact, in America, credit is much sought after and most of the Americans live off on credit. The level of debt that Americans have on their head is unparalleled.
Even in India, the penetration of debt is increasing. People are buying more and more on credit these days. But, the question that needs to be answered is whether or not credit is a good thing? Many argue that credit is vital for the economy at it creates demand for goods and services, thereby pushing growth in the economy. A growing economy in turn benefits everyone. The other school of thought is that debt is bad since it eats into your savings and your future earnings in a way are used up servicing the debt. This reduces your savings and investment ability thereby impacting your overall financial well being. Both these arguments have their own merits. My take from an individual's point of view is that credit when taken for productive purposes is always good while credit just for consumption sake is not good.
Like most other things, credit too is both good and bad. From an individuals perspective the credit taken for productive purposes is good credit while one taken for buying consumption item is bad credit.
GOOD LOAN- Loans like housing loan taken to buy a house for you is a good loan. It helps you get a house to live in which is a necessity. Also without your own house , you will have had to stay on rent ,which is an unnecessary expense. Housing loan helps you save on rent and build a long term asset. Similarly, education loan taken for financing higher studies,too is a good loan. It helps you get higher degree, which enhances your employability, and thus increases your earning potential. The money earned after acquiring higher education is much more than the money paid as interest on the education loan. The crux of the matter is that the loan which helps you earn or save more than the interest paid on the loan, is good for you.At times, there are medical emergencies where you may need to take loan. Eventhough these may not earn you anything in return monetarily, these are also considered as good loans, as they help you save life and life as we know is priceless.
BAD LOAN - Loans like sales finance loan, taken to buy LCD TV, second car, sports bike etc comes under this category. Other examples of bad loan would be personal loan taken to finance your holiday, loan taken for spending on lavish wedding etc. These loans do not add any monetary value and are meant only for consumption.You end up paying huge interest on these without earning/getting anything out of it. However, a loan taken for buying a truck to be used for commercial purpose is a good idea since it will earn you more than the interest that you pay on the loan.
So, next time when you are thinking about taking any loan , ask yourself if this is a good loan or bad loan? Go ahead with it if you think its a good loan to take , else you will do well to pay heed to our forefathers advice of shunning loans at all cost.

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