“Kya loan lena paap hai?” - Well not every time. In actuality some loans can increase your wealth while others can gradually trap you in debt.
Let’s start by using a very basic example to comprehend this –
Meet Rajpal and Aliya, two Meerut residents who are neighbours. Rajpal took out a personal loan of ₹8 lakh to purchase a designer watch, a new iPhone and a trip abroad.
Riya on the other hand used a ₹8 lakh education loan to enrol in a digital marketing course (spent on skill enhancement and self-development).
Four years have passed. Rajpal's trip is only a memory and his watch and phone are outdated. He continues to pay EMIs. Riya easily paid back the loan in two years while getting into a better job that nearly doubled her pay. She now has good savings and a comfortable life.
The same amount of money borrowed and same elapsed time but quite different outcomes.
What does good debt mean? - Good debt is the kind that enables you to acquire something (such as a skill or asset) that will eventually increase in value or bring in money for you.
Here are a few examples of good debt.
- Home loan: The value of your property typically increases with time.
- Education loan: If not right away a degree or skill can boost your earnings in the future.
- Business loan: If you launch a successful small business that makes profit.
- Gold loan: If you don’t use the funds for luxury but rather for a productive need.
Good debt is like a seed. Today you borrow water but you use it to grow a tree that bears fruit forever.
Bad Debt: What Is It? - The money borrowed to purchase items that quickly lose value or only provide fleeting happiness is referred to as bad debt.
Bad debt examples are as follows.
- One day of fun, years of stress: a personal loan for a lavish wedding.
- When you pay for a new TV or phone with credit card EMIs the model is already out of date.
- Loan for a trip abroad: While memories are priceless, it’s not a good idea to pay EMIs for three years on a 10-day trip.
Bad debt is like using credit to purchase ice cream. The bill remains even though the ice cream melts quickly.
A Simple Rule to Keep in Mind
- Before taking out a loan consider the following: In the coming years will this help me build an asset or earn more money?
i) Yes → Its probably a good debt so can proceed but cautiously.
ii) No → Probably a bad debt (stop and think again).
A Little Caution
If you borrow too much even good debt can turn bad.
A home loan is beneficial but it becomes a nightmare if your EMI consumes 70% of your income. EMI should therefore never exceed forty percent of your monthly income.
Prior to obtaining a loan always have an emergency fund.
Never take something for status or to win people over.
The Bottom Line
I’m not advocating against taking out loans. What I’m trying to say is you should borrow like a professional not like a kid in a candy store.
Accept a loan if it can help you in the future. Turn and run away if its only for today’s celebration. Your future self will be grateful.