Is taking loan is really a bad thing? Are all loans bad? The answer to these questions depends on the type of loan you are taking. First let us understand what the difference between good debt and bad debt is.
When you are borrowing money for buying something which will appreciate over the period or act as catalyst to generate extra income then that may be called as good debt. The most common example of good debt is home loan. You borrow the money for building home that will appreciate over the period. It will save you rental income, it will give you tax benefits. In short you are using loan money for building the asset at present cost which will appreciate in the future. Gone are the days when people use to save money and purchase / build houses without taking any loan. For that also, there were varied reasons.
1. Home loans were not easily available,
2. Interest rates on home loans were too high.
Now a day’s easy access to home loans, better income tax benefits makes home loan better instruments for wealth generation
Another example of good debt is education loan. You are investing money to complete your education which in turn will create better job/ business prospect for you. It will fetch better income for your family.
Someone can take a loan to start his own enterprise / business also categorized it into good debt. However one should be cautious to check your risk appetite before applying for a loan.
Before taking a personal loan, ask yourself whether loan money will be used for fulfilling the need or attaining desire goals. E.g. you might take personal loan for medical emergency. This is your need. You cannot compromise on your health. You have to raise money for it. But if you are taking a personal loan for buying costly mobile, imported gadget this is your desire. You should stay away from buying such things on loan.
If you are using debt money for buying depreciating assets, it can be treated as bad debt. Car loan, personal loan for buying consumer durables, going on vacation and then paying the money by choosing an EMI option etc. can be considered as bad debt. In the medical profession, doctors always say prevention is better than cure. Same thing applies for bad debt also. As far as possible try to avoid taking these type of loan. Even if you have taken it, give preference to closing these loans at earliest. These loans are one of the biggest hurdles in wealth creation. Not taking a loan for a vacation doesn’t mean cancel your dream vacation. The only thing one has to do to plan the vacation well in advance. Set goals for vacation, calculate approximate expenses, start saving towards this goal. Once you have accumulated the money, enjoy debt free vacation. It will be more enjoyable and relaxing. Remember the golden rule: Invest today and spend tomorrow, don’t spend today and (over) pay tomorrow.