When Not to Take a Loan...Good and Bad Borrowings

When Not to Take a Loan...Good and Bad Borrowings

Jan 22, 2022By Admin

While you work hard to achieve your financial goals, loans can often come to your rescue and assist you in completing significant milestones such as education, marriage, purchasing your first car, or purchasing a home. Credit has become extremely accessible as a result of increased competition among lenders and technological advancements. Taking out loans without doing your homework, on the other hand, could result in you defaulting on payments, putting you in a debt trap, and ruining your credit history. Your prospects of obtaining a loan in the future will be harmed if you have a bad credit history.

Good vs. Bad Borrowing

Make sure you know why you want to borrow. Borrowing wisely allows you to achieve your financial objectives without putting a strain on your budget or entire financial life cycle. A loan made with a higher interest rate could be considered bad borrowing. Even a loan taken out to purchase an expensive vehicle that you don't need qualifies as a bad loan.

Purchasing for a good cause will either help you build an asset or increase your current and future earnings. "Buying an appreciating asset, such as a home, can make a borrowing good, with income tax benefits; purchasing property offers the chance to earn in the form of rentals or capital gain in the value of the property; an education loan can help you to earn more in the upcoming years, so it is assumed a good borrowing." A good debt should be taken on with a measured risk in order to ensure a secure future/high return and to improve financial planning. Good debt provides leverage and opportunities for additional advantages, whether through investment returns or education.

Borrowing for depreciating assets should be avoided if at all possible. However, this may not always be the case if you earn a bigger return through its use, such as a vehicle purchase on credit but utilized to generate revenue that exceeds the sum of the loan's interest rate and the vehicle's depreciation value. Bad borrowing might include gadgets, home appliances, and furniture purchased on credit. Vacations, marriage, costly phones, and so on are all examples of bad borrowing. You should need to ensure that collective repayment (EMI) that you pay per month should not be more than 50% of your household income in any case.

Avoid loan for below reasons:

You won't be able to pay back the loan easily: Your credit score will be harmed if you default on payments.

If you're a shopaholic, don't use your credit card or other credit lines to make purchases you don't need.

The loan isn't rational: don't take it just because it's a good deal.

Uncertain income source: If you don't know if you'll be able to make ends meet, don't take out a loan.

Borrowing against your retirement: It takes a long time to build up a retirement fund; don't ruin it.

Never invest with borrowed funds: "Borrowing money for investing or speculation should be avoided," says by financial experts. "Debt instruments such as bonds, debentures, and certificates of deposit provide set returns.

These profits may not be enough to cover the cost of borrowing. Equities, on the other hand, are very volatile. There's no guarantee that the money invested there will pay off." If the investment made with borrowed cash fails, your goal of paying off the debt with borrowed capital will be harmed. Furthermore, if you are facing financial difficulties, such as a losing a job, the pressure will increase. Use your savings if you want to invest.

Finding the Correct Loan:

Debt is contextual, circumstantial, and specific. Depending on one's financial condition, a good debt can be a terrible debt for another. Good debt is one of the most effective methods to achieve financial independence and achieve long-term goals. Check whether taking out a loan would be beneficial or will become a responsibility before applying for one. It's essential to evaluate your current financial situation and determine how current borrowing will benefit you in the long term.

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