Skip to main content

Loans you should avoid

Originally published at BeinfFinWise

 __

Giving loans is a risky 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 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 cos t 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?

OR 

Avoiding loans, investing diligently (and hopefully wisely) and trying to achieve financially freedom?


Comments

Post a Comment

Shop @ Amazon

Popular posts from this blog

What if this is not 'this' ?

What if I suddenly realized that my life is going as per the script pre-decided by some novelist, and I actually don't have any control over it? What if my life is nothing but a non-stop uninterrupted TV show, running for 25th consecutive year with me unaware? Wat if I am actually living a century before, and am actually on my journey to know the future of the world? What if in reality ghosts are the only things that exist, and humans are merely an illusion ? What if time was actually not moving in forward direction? What if on one fine day I find that they are about to demolish the earth to build the inter-galactic superhighway? What if trees and animals suddenly interchange their roles and vegetarian plants eating only animals, while non vegetarian plants eating both plants and animals? What if I am suddenly arrested just for imagining these all as I am committing a thoughtcrime ? Seems like an overdose of fiction and movies! Am I getting, rather sinking deeper and deeper into th...
8 comments
Read more

Downhill

That was the last of the drink left, and he gulped it down. They had finished it all. Had there been more booze, they would have gulped it too. It was around 3 in night, but then there was still a lot left in the night. The lights in the city below had faded along ago but it still looked beautiful. After all, the beauty of the city was not dependent on light. And from this place, located uphill somewhere amidst wilderness, human settlement was the last thing that could have come to their mind. But in the end, that was where they all had to go to. They walked back to their cars and planned to head back to their hotel, which was some 20 km away at Shimla. They were a group of 7 people - all college friends out on a trip to Shimla to celebrate the last extended weekend before getting out of the B-School. One of the guys had a car and all crammed into it and headed for the vacation. The owner of the car, Chandru as the fondly called him was too drunk to drive. But he had often been too...
4 comments
Read more

The Shrill Voice

There was a shrill voice within, Longing to see the light With each passing moment It grew louder and bright. It didn't stay there for long As louder became its screams, Sounds of half-fulfilled wishes And long abandoned dreams. And then I asked those troubling voices What is your wish and what do you want? It spoke, and I replied -Y our wishes are unreasonable, And asking something that I can't.
Post a Comment
Read more

The parrot

"You shall have your freedom", Said the generous master, As he opened the cage. The parrot was delighted, As he suppressed his joy, And controlled his rage, For so long he had wished, To be free and be Up in the sky. At last his chance had come, And towards his destiny, He shall fly. And then the realization dawned, That his wings were clipped, How shall now he even try?
4 comments
Read more

All for a Car

"Boss, I want a car" "What? "Yes. I want a car" The boss thought for a moment. Ravi was asking for a car. Maybe he needed one. He could give him one for an hour or so. The boss was the owner of the agency, which dealt in dealing with distribution of FMCG products of a big company and was a person who had a soft corner for his employees, something which is rare in such type of work. Ravi was a small time computer operator earning Rs 5000 a month at the agency. The job involved sitting in front of a computer in an air conditioned room and punching orders and preparing the bills on the company software. But the demand for a car was a bit shocking. No employee ever asked him for a car. "Why do you need a car?" "Boss. I am getting married" "Good. Congratulations" "Thank you boss." "So do you ..." "Sir, I have told my to be father in law that I earn 35000 a month and have my own car. I'll be engaged soon. He ...
6 comments
Read more