Should I Take Loan?

By
Hemant Beniwal
32

Have you ever asked yourself or any professional “Should I Take a Loan?“

Have you ever asked yourself that “Am I doing it Right” before swapping your credit card?

Have you ever told your wife “I don’t think we should buy this on Loan” while shopping for a Washing Machine or TV . If your answer is NO go ahead and read this article.

Read – Do NOT opt for Home Loan Protection Insurance Plans

If you think loans are difficult to get, believe me, creditors love giving loans. It is a big business after all. Be it the bank or a private financier, the interest they earn from your loans is what keeps them running. The more loans you take, the happier you are, but you are also making them profitable. And make no mistake about this either as long as you are in debt, you will never attain financial freedom.

Check – Must have features for your credit card

Indians have just developed a tendency of getting into debt. The most common kind is credit card debt. The credit card was made to ease you to carry bundles of notes. But many of us use it as an EMI solution. This is simple; buy now and worry later philosophy. That is the easiest way of ruining your financial freedom. Credit cards should be used not as a source of credit, but just a convenience that saves you from having to carry cash. Spend only what you can pay off immediately or before the due date. The focus should be on retiring the balance that has accumulated on your card as soon as possible. At 30 percent plus a year interest rate, this is the worst kind of debt possible. And that is the reason every bank or financier is behind you to take a credit card.

Read – Top 10 Credit Score Myths that need to die

However not all debt is bad, there is good debt as well. Good debt is used to create productive and long-term assets or to increase one’s income-generating capabilities. So a home loan, loan to buy land, education loan and business loan to set up a business would fall under the ‘good debt’ category. Here maximum one can do is to evaluate and go for the option which is less costly. And the cost is the interest charges that one pays. The simple way to evaluate is to compare the EMIs of different loan providers. Just remember that for comparison the loan amount and the tenure of repayments should be the same. With the loan amount, also compare the processing fees. It ranges from 1% to 4%. This is also a part which can be negotiated.

Read – 7 Costly Credit Card Mistakes Almost Everyone Makes

Nowadays, debt repayment is basically your credit-character certificate. If you have chosen to take a debt, it is equally very important to repay in a disciplined manner. Any overdue, late charge penalty will spoil your ability to take further loans. The data of loaners is centralized by the CIBIL (Credit Information Bureau (INDIA) Limited) and before you apply for your next loan or credit card the financier checks your responses to the loans taken earlier. A lot of times when one starts earning, people accumulate credit cards overdue and this default keeps on reflecting in your CIBIL report. And than in your serious days, when you have actually made up your mind to buy a dream home or a car, the bank refuses to give you a loan until you clear your credit.

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Debt is like Mount Everest, difficult to climb and even tougher to come back. While getting out of any debt is vitally important, it is even more important for bad debts. When one is servicing multiple loans, the costlier one should be settled sooner. So credit card dues should be paid first followed by personal loans, car loans, and housing loans.

Another thing that should be kept in mind is the tax implication. Certain loans, a home loan, for example, would avail tax benefits for the principal paid under Section 80C and for the interest repayment under Sec 24 of the Income Tax Act. Hence, when faced with two loans, first settle the one which has higher interest rates and doesn’t provide any benefits.

Of course, the best way of avoiding debts is to not get into any. But modern lifestyle directs you towards it.  While some loans might not be avoidable, a lot are. Use a strong justification while getting into more loans and always maintain a fact that you will not go overboard as more debt means more sacrifices in terms of money, in your present lifestyle.

It will be great if you can share your love & hate relationship with loans 🙂

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32 COMMENTS

  1. I have house on my name but it is on house loan. Can any bank grant me the loan for it?? Its been three years I am paying my EMI regularly.

    • Hi Subhash,

      You havn’t specified for what you want to take the loan from the bank. If it’s a Loan Against Property (LAP) then it can be taken only against free-hold property. Which means your house should be free from any encumbrance (i.e. it is not given as security for any purpose).So if you have a home loan running, you will not be eligible for LAP till you repay your home loan. Kindly specify what is the objective of taking a loan from the bank.

  2. i have few small debts from 5 different people totaling about 5 lakhs and each one is having interest rate of 20% pa. should i take a personal loan at 14% and settele it at once or should i myself pay it monthly. which one is better.first one is having a peace of mind quotient

  3. Hi,
    Sanjay I will ask you to pay after taking a personal loan because it will save your 6% interest and after taking loan you should start paying the interest amount from your monthly income.
    In future you should keep emergency funds in your Bank Account between 4-6 months so that if loss in job that would not result you to pay your personal loan payments.

  4. True.People often have a habit of paying just the “minimum due” on their credit card even if they can afford to pay in full – without even realising how much they are actually paying for this revolving credit. Same goes for other loans like Housing and educational loans. Have come across people who have huge loan outstandings but still invest the surplus money in investment products.

    • Hi Annapurna,
      If someone is paying “minimum due” he is best customer for credit card company – getting 30-40% return/interest is an awesome business 😉

  5. I am having home loan, so it looks to be good debt, but still try to prepay to get rid of it.

    I am using credit card for last 5 years, never ever paid any extra money to bank in form of interest or other charges. Its important to use credit card in smart manner after all you are getting 52 days free credit/

    • Hi Neeraj,
      Credit card is having lot of side effects biggest is it spoils our spending habits & impacts saving capacity.

  6. Hi Hemant,
    This article is quite useful. Specially the part ‘Good debt is used to create productive and long-term assets or to increase one’s income-generating capabilities. So a home loan, loan to buy land, education loan and loan to set up a business would fall under the ‘good debt’ category.’

    This answers my query posted on your last article about real estate investments. This is what exactly I meant when I asked whether I should buy a property (with 60% loan) to generate a second source of income. For a few years rental income will pay-off the installments, later the property will generate rental income as second source of income.

    Thanks Hemant for this article. 🙂
    Regards,
    Nishi

    • Hi Nishi,
      Buying Home/Flat is a big decision – do all permutation combination before taking plunge.

  7. Dear Hemant

    You are absolutel right when you distinguish between productive loans and unproductive loans.

    As long as value is getting created out of the loan taken and that could be business growth, asset creation, value creation etc and where the value accretion is far higher than the interest outgo and of course your peace of mind then it is definitely wise to go for loans.

    I have seen certain people completely desisting from the word credit. One needs to understand as long as your interest outgo is lesser than the income earned one must be prudent to cease the opportunity.

    I also advise people against spending on borrowed money. Now that’s an unproductive loan that will only cause heartburn in future. After all our ancestors were no fools in advocating “Jitne Chaddar untna Felav” when it comes to spending.

    • Hi Narendara,
      Rightly said – see car loan for consumers is bad idea but same loan for a taxi owner is a business decision.

  8. Hi Hemant,

    Yes very nice article. Loans are really a pain for a human being and as you rightly pointed out that it takes away our financial freedom. According to me we should take things like LCD’s, washing machines or refrigerators on EMI’s as we get those things on zero percent interest rate for which we only have to pay Rs. 500 to 600 for processing fees which is quite affordable.

    • Hi Manoj,
      If we are paying Rs 500 processing fees on Rs 10000 loan – it is 5% & if we are talking about payments in 6 months – it is 10% interest rate. 2 more things:
      1. You loose benefit of cash discounts or bargaining.
      2. You may purchase unnecessary goods which actually you don’t need or you can’t afford.

  9. Hi Hemant,
    Very good article. One more question – taking a personal loan from a bank at a slightly lesser rate than the term deposit rate and creating an FD out of the loan amount – repaying the loan through monthly EMIs. Is it worth doing? Of course, there will be a service tax component which gets added up to the EMIs. Pl. suggest.

    • hi rajanna,

      1)first,you will never get loan at lesser rate than FD.
      2)second , if this happens (I don’t kow how ) do good mathematics, and yu will find yourself in loss.

      Rakesh

  10. We all are happy to take Income Tax exemption on Home Loans. In fact, I have seen people, who can afford to pay for a house outright, taking home loan to avail IT exemptions. Can you please explain, do we really gain in this way or its just a myth?

    • Hi Biswajit,
      If you are able to find an investment avenue which can deliver more than Home loan rate minus tax benefits.

  11. Thanks again for this knowledgable article.

    Please revert for the newcomours, are going to take Homeloan in a specified monthly income in the current scenario.

    Regards

  12. I want to invest on some mutual funds. I need advice from you. Please give me appointment so that I can meet you in your office.
    Thanks

  13. I had bitter experience. Thought of sharing to our readers.

    I took floating rate car loan (at 10.25%) assuming the rate will come down (as RBI started reducing their ratios) by parking my money in FD’s.

    Banks didn’t reduce the interest rate for my loan. My money is locked in

    The bitter part is that
    1) I paid additional charges to bank like processing fee
    1a) additionaly stamp charges
    2) While closing the loan, i paid Rs.200 for getting closing charges
    3) RTO charges to remove hypothecation
    4) Additional effort by me to run between banks and RTOs

    Thats one of my bad financial decision. Lost in the gamble 😀

    This experience could be part of your blog

  14. I am always looking for ways to get money without taking a loan. However, sometimes you simply can’t avoid it. It’s very important to know how to choose one.

    By the way, I was wondering if you accept guest posts on your blog.

    I am kindly waiting for your answer.

    Paul

  15. Hi Hemanth,

    Nice article again on loans, Actually I am planning to take a home loan of Rs 15L to construct a new building in my open plot. Before that I have 2 PLs(1Lac with 16.50% ROI & 1L with 14.25% ROI). After 6 months from now I am planning to close this 16.50% ROI PL as it is very high compared with other one. I heard that banks will charge 4% on principle outstanding of my PL along with principle outstanding amount. Is this correct close like this instead of paying high EMI for 3 years or do I need to continue as is with EMI for next 3 years?

    Pls suggest the best way of closing the personal loan as it will affect my home loan limit as well.

    Regards,
    Kamati Srisailam

    • Kamati,

      Yes, in foreclosing a PL, banks charge some penalty. You can only avoid it by making a part prepayment and not closing the loan fully.

  16. Thanks Vikas, is there any extra charge for making a part prepayment ? Maximum how much amount can make prepayment in my case as said in above?

  17. God bless you sir, You are doing service to humanity which is service to God. Keep it up. thanks and best regards.

  18. dear Mr. Beniwal,

    I have two loans:
    i. Home loan @ 10.4% (Started in 2012)
    ii. Refundable PF loan @ 9.65% (Started in 2012)

    Which of the above I should close at the earliest.

    best regards,
    mohan

  19. If one can afford down payment for buying a house, should one go for a home loan or not? Any specific advantages of home loan? (apart from some tax saving)?

  20. My application was rejected. Credit Sudhaar was my choice. Initially they were slow. But their counsellors were able to handle all my queries. I will give Credit Sudhaar a positive review.

  21. I want to buy a car, I have 625000 in bank fixed deposite with 8.5% interest.
    The amount required to buy a car is 625000, should I BUY THE CAR BY WITHDRAWING THE FD OR TAKE A LOAN WITH 10.5% INTEREST ON MONTHELY REDUCING BALANCE FOR 5 YEARS, WHICH WILL BE CHEAPER?

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