One should borrow to finance the needs, not the wants
One should borrow to finance the needs, not the wants
Everybody is not lucky to remain debt-free in this world. But you can make debt work to your advantage if you can make a balance between the needs and wants.
Conventional wisdom has always frowned upon making purchases that are unaffordable, as it amounts to living beyond one’s means. By extension, borrowing, particularly to spend, has been berated too. To a great extent, those preaching thrift were vindicated when the financial crisis engulfed the globe — consumerism fuelled by easy availability of credit and disregard for the savings were identified as the chief culprits. Yet, it is difficult to resist the temptation of offers promising loans with ‘zero’ interest to help you purchase a refrigerator, washing machine or an LCD television, or to fund a holiday to an exotic destination abroad. They also help the loan seekers fulfill a need that would not have otherwise been possible. Therefore, key is to make a balance and to separate your needs from wants. One should sign up for only those loans which either create an asset or finance a must-have.
LOAN FOR BUYING APPLIANCES AND GADGETS
Consumer durables would fall somewhere in between. A refrigerator may be a necessity for some, rather than a fanciful desire, in cities. Therefore, affordability cannot be the only deciding factor here. It would also depend on the intensity of the need, the cost of the loan and your ability to service the loan. For instance, if such a scheme is being offered in association with the company’s financing arm, the deal promising zero interest loans might make sense. At the same time, if the dealer is offering a discount against full cash payment, you would need to take a call. It also depends on how expensive the scheme is — if the interest rate is, say, 12% per annum, you could consider it, but if the interest rate is over 18% then the deal could be termed as unviable. Also, you need to bear in mind that contrary to what their name suggests, you may have to pay a processing fee or other charges that could inflate the outgo.
Apart from that, you need to consider your earning capacity also. An individual with an annual income of Rs 10 lakh should avoid taking a loan for, say a washing machine costing Rs 15,000, as one can easily afford the same by saving enough. However, those earning Rs 2 lakh per year with a genuine need for the appliance could opt for a loan entailing an EMI of Rs 2,000, for the sheer convenience it offers.
HOME LOAN
When it comes to housing loan, there is no doubt about the category it falls under. Given the property prices in the metros, buying a house outright is next to impossible, unless you already own a property that can be sold for the purpose. Thus, there is no substitute for a home loan. Besides, these loans are available at a lower rate of interest and also for longer tenures, thus putting relatively less strain on your finances. Also, the tax benefits home loans offer — Rs 1 lakh on principal repayment under section 80C of Income Tax Act and Rs 1.5 lakh on interest paid under section 24 — make them attractive.
LOAN FOR WANT OF A CAR
Personal car is another asset that carries high aspiration value in India, next only to a house property. Moreover, it offers immense convenience too. Taking a car loan, therefore, need not be seen as a sign of fiscal imprudence, even if it is depreciated in the value of asset over a period of time. A car loan would make sense if you get a good deal as it results in the creation of an asset whose utility value is high.
LOAN FOR WANT OF VACATION TRAVEL
When it comes to travel loans, it is advisable to abide by the conventional wisdom. If you can’t afford the holiday travel which you have planned, then change your plans. Set your sight on the holiday plan that can be funded out of your savings. Spending on exotic holidays would qualify as a discretionary expense — a luxury, not a need at all. Since these are financed as unsecured loans, the rate of interest is also high, which means that your borrowed time – off could give you more grief than joy.
PERSONAL LOANS AND CREDIT CARDS
Banks don’t think twice about dangling such loans if they find your profile to be suitable to their requirement, but it is advisable to stay away from them if the main purpose is spending not any emergency requirement. These debts come with exorbitant interest rates and demand extreme caution while availing of the same. Ideally, these should be tapped only in the event of emergencies.
In short, viewing borrowing as a precursor to a disastrous financial situation may not be the right approach to adopt. Instead, evaluating each debt on its merit could provide the right balance between fulfilling your needs and living within your means.
BORROW ONLY IF YOU MUST
Separate needs from wants while deciding to borrow money. Analyse the cost of waiting for the purchase versus the cost of borrowing. Borrowing to buy a home always makes sense because of fiscal incentives. Always look at the real cost of borrowing — processing charges plus interest rate less rate of inflation. These days, prices of consumer goods decline because of technological improvements. Merchants often give discounts for upfront payment for goods that are otherwise available in instalments. Using credit card for financing consumer goods is probably the worst option. Take a loan, preferably, only to create an asset. There is no substitute for home loan, given the spiralling real estate prices in metros. A car loan could be justified as it offers high aspirational value. Change your holiday plans if you need a loan to fund your travel plan. Personal loan is an expensive debt, hence the best option is to avoid.