Taking a loan nowadays to meet expenses has now become a fad in our country. The availability of easy credit in the economy has fuelled consumerist trends to such an extent that gradually people are getting impulsive about taking loans to meet unwanted purchasing decisions. There is no harm in going for loans to meet our consumer demands except for the fact that these are loans that go towards creating liabilities on the long run. And thus these are Bad Loans!
Well! If these are bad loans, then what are the loans that can be termed good? Good loans are those that are worth taking and on the long run create assets! So today let’s talk about good loans and how they enhance you bottom line!
Good Loans
So what are good loans? Well when a loan has been used to create an asset/debt rather than paying off some sort of liability, the loan is termed good. The advantage of acquiring income producing assets out of loan is that whenever you will get out of that debt, you will be the owner of one income producing asset.
On the other hand if you have got a loan that you use to acquire some items of regular consumption or use, you are simply assigning a part of your income to pay off a liability that has created a depreciating item.
What Loans Should You Be Taking?
Loans taken to create an asset: As long as you are not speculating that the asset value will go up, it is worth taking a loan to build an asset. If you acquire debts to purchase a house for example, you are adding an asset to your portfolio whose value will keep on growing in the future. You are thus adding to your net worth all the while the assets keep growing in value.
Loans taken to increase your human capital: If you take a loan that spruce up your skill and career prospects, you are again creating long term assets. Study loans for example provide you with the option to improve your earning capacity in the future. Such a loan is worth taking.
Business Loans Business Loans are always good loans because over a period of time they would help in creating assets that would help you earn in the future. A loan taken for funding a business is always good.
What Loans Should You Avoid?
Loans taken for consumption: Taking a personal loan to fund your expenses is always disastrous because it does not create any asset for you in the long run nor is there any improvement in your bottom line. It has common now a days to go for loans in order to fund life styles. Use of credit cards is also random. You should always remember that using a credit card you are not only paying interest later but also end up purchasing more than you have thought of. People end up using credit cards to purchase clothes and accessories that they would have normally avoided purchasing in cash. This kind of tendency is disastrous not only because it creates liability but also because it can put them in a debt trap.
Loans taken to buy assets that depreciate: If you take a loan to buy the latest cell phone or LCD television, a car or any other appliance, you are not creating an asset that goes up in value. What happens on the contrary is that the very moment you unwrap the product; it is no longer worth what it was a few moments back. Another problem with products or appliances is that they are rendered obsolete in the market after a few year as newer and improved models always keep on flooding the market. And then just think of the resale value of such products if you were selling them to repay your loan. It is thus always advisable not to go for loans when you are buying goods or appliances that depreciate in value.