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

Art of question paper leaks

(Following is based upon a real discussion which I had today morning) As I was making efforts to keep myself afloat in the swimming pool, I overheard some conversations - "Puraa paper pataa hota hai, wo to humein mil hi jaata hai ... tab bhi hum nahi padhte hain" . .. and so on The guy who did bulk of talking looked around 15 years old and seemed like quite a spoilt brat. I chipped in with some expert comments and questions - "Which board?" "Kisi bhi board ka" After a minute of chat I gathered that he had just given Class 10 exams in ICSE board and was planning to take science stream(PCM), and he studied in a school (say SKP). He had earlier managed to do the same at his previous school (say CRK). Inquisitively, I tried to gather more information on how he manages to get the paper "Bus kuch nahi, security guard ko paise do. 8th, 10th, 12th ke papers. Wo ek extra copy karaa leta hai. ICSE ke paper out karna sabse easy hai. Koi seal nahi hoti" ...
7 comments
Read more

We accept the reality of the world with which we are presented

(Disclaimer: I am NOT justifying any action or behavior. I am just speculating why people usually act so) _________________________________________________________ “We accept the reality of the world with which we are presented” – The Truman Show (a 1998 movie starring Jim Carrey) The above line explains a great deal about why we hold on to some beliefs as gospel truths, and form our judgment about things and act in a specific pattern. This movie (which I feel is still quite under-rated!) had Jim Carrey, a person whose entire life had been a live, non-stop, unedited television show. He lived in a world which was completely artificial; everything, everyone knew that everything were fake. But the person was real. His emotions were real. He was conditioned to a certain realities of world, and believed in it. The makers of the show did not want to show him what the ‘actual’ world was. He was made not to want to explore the outside world, made to fear things that could have led him ...
5 comments
Read more

What's the purpose of investing?

"Investment" - This word is much used and often much abused one. One keeps on hearing this almost all the time be it in office or catching up with friends or attending a family functions - almost everywhere. More so when we are fed with lot of information about how one needs to make money work to get more money. However, for a lot of people, the clarity on one question is often lacking - What is the purpose of investing? And even if one knows his/ her purpose of investing, it is often not implemented in real life. For instance, purpose of one's investments may be having sufficient funds in times of need. Yet they may opt for a personal loan when faced with pressing need for money. Based upon my observations, below are some of the most common purpose of investments (in no particular order) I invest because there is some sufficient funds lying with me and I can get great returns. I am investing for some specific goal - buying a house, education of kids, m...
1 comment
Read more

Hunting Good Will and Good Ideas !

Good Will Hunting (GWH) One of the movies is saw today ... It was a repeat telecast. First time I watched it, I thought I missed some of the subtle aspects of the movie. An it was definitely worth it! Earlier, I found it good, but now it is among my favorites it seems! In a nutshell it is about a young mathematical genius Will Hunting (Matt Damon), who works as a janitor in MIT, but is fighting with demons of his past and fears to open up with people, spending his talent and energy uselessly. It is also about a psychologist (Robin Williams), who helps Will to cope with it, to follow what he want and all that. Strangely, Robin Williams somehow reminded me of his role in Dead Poet's society, which was completely different! Apart from the script, performances few things, rather ideas stand out in the movie! Few thoughts apart from usual channelizing your energy, looking deep within yourself kind of stuff - One is that based upon a person's talent, often others set criteria abou...
4 comments
Read more