Power of credit
Credit is very powerful, It will either let you grow or ruin your financial position completely. For Everybody, at least once in their life, will come a situation where they have to take credit (loan). So, we all depend on loans at some part of time in our lifetime.
Credit is part of your financial power. Did You Know that 79% of loans are approved for individuals with high CIBIL Score. Higher your Score, better are the terms offered by lenders. — CIBIL. Financial institutions use your credit history and score as one of the factors to determine whether to lend you any money, how much and at what rate.
A good CIBIL score (of 750 and above) can get you:
- Lower interest rates
- Higher loan amount
- Quicker loan approvals
- Longer repayment periods
For more details on how to improve your credit score, click here
Apart from Credit Score, before taking a loan we must consider other factors like interest rate, payment period, whether it is compound interest or simple interest and so on. And there is one basic question you need to ask. “Why should I take this loan? How will it affect my life and my financial position in the future?”
What is a good loan and bad loan?
Good loan: the one which helps improve your financial growth.
Bad loan: one which hinders your financial growth
Myths! All credits are bad credit! No. It’s hard for one to lead a life without taking credit. Unless you are blessed with plenty of assets.
Good Loans:
Home Loan
Home loan allows you to purchase an asset that will provide you with regular income if you rent it out. Also, since real estate prices are likely to rise over time, you may be able to earn a good price when you sell it. Furthermore, a home loan comes with tax advantages. While principal repayments can save you up to INR 1.5 lakh in taxes, interest payments can save you up to INR 2 lakh in a year. There will be no limit on tax deductions for interest payments if you put it on rent.
Even the monthly payments on a home loan might be significantly lower than on other loans because the interest rate is typically between 7% and 8% each year. Given the bad economic conditions that have persisted as a result of COVID-19, it could fall even farther. Your payback cycle will be rather long because this loan is for a long period of time, i.e. 20–30 years. Paying your EMIs on time for a long time can only help you build an excellent credit score.
Benefits:
- There are number of tax deductions available under home loan, which makes home loan a biggest tax saving instrument.
- Under Section 80C deduction for stamp duty and registration charge can be availed with 1.5 lakh rupees as limit.
- Tax deduction under section 80EEA of up to Rs. 1.5 lakh
- House is generally a “appreciating: asset. By renting some part/whole of your home, you can generate passive income.
- Even the monthly payments on a home loan might be significantly lower than on other loans because the interest rate is typically between 7% and 8% each year.
Student loans
It allows you to pursue an education while also increasing your long-term earning potential. On average, people with a bachelor’s degree earn 66 percent more in their lifetime than those without one. And, with today’s shortage of tradespeople, individuals who take on a tiny bit of debt to finish trade school considerably boost their earning potential.
Benefits
- Build positive credit history: To get a loan in future you should have good credit history. For which you should have taken loan. Education loan being a first loan that you will get. Helps you improve the credit score for the future.
- You will get a moratorium period of upto 1 year to start paying interest.
- Under Section 80E those who availed education loan and co- applicant can get a tax deduction under your total income.
- And as a bonus, It adds more responsibility among the students to grow financially.
Small business loans
A small business loan can help you start or expand a firm, allowing you to enhance your cash flow in the future. Small business loans are usually collateral free
Benefits:
- Interest on business is tax exempted.
- Even if you take personal loan for business purpose, you will get tax exemption for interest paid.
- If you fund your business from sources like investors, you need to pay the profits in percentage. Whereas with the banks, interest is fixed.
Bad loans
The title suggests that the loans that will be discussed here are bad and should be avoided. These loans do not provide you with much benefit. If you pay your bills on time, they may be able to assist you in obtaining a decent credit score. Aside from that, there isn’t much to brag about. Let’s take a look at some examples of bad loans.
Using Credit Cards or Loans to Purchase Smartphones
We all live in a world where we tend to follow our friends in order to avoid being distracted. Many of us use loans or credit cards to purchase expensive mobile phones like iPhones in order to retain social respect and keep up with our friends.
If you are utilizing your savings to purchase such accessories, there is no harm in having them. The reason that using loans or credit cards is not a good idea is because the value of these phones drops dramatically and quickly. It wouldn’t be surprising if phone prices fell by 30 percent to 40 percent or more in a year. As a result, the money you spend for these phones through loans or credit cards will be far higher than the money you could earn if you sold them.
Car Loan
Due to the high cost of cars, you will have to take out a loan to purchase one. An automobile, like smartphones, is a fixed asset with steep price drops over time. So, if you don’t need a car, don’t take out a loan to acquire one. The loan payment will be substantially higher than the proceeds from the sale of the car.
Problems:
- Depreciation: In reality, the price of a car begins to decrease the instant it leaves the showroom and reaches the road. And, after 2–3 years of purchase, the car’s price can drop to half of what it was at the time of purchase
- Car loan interest takes 7 years to complete, In meantime there could be an emergency situation where you need to finance a loan. It is always advisable to take out loans only for “unfortunate” reasons.
- If you need a car but you are short of funds, It is better to go with second hand cars. Banks provide loan for 85% of car value, If possible, it is better to pay beforehand as much as possible and then take loan for the remaining amount.
Investing with a Loan
The prospect of investing in stocks and profiting handsomely from them can entice you. However, do not take out a loan to invest in such opportunities. The reason is straightforward. Stocks can provide substantial returns, but they can also be a dangerous investment. Due to persistently negative market emotions, the stocks you acquire may crash, resulting in a bombardment of losses for you to deal with. Also, if you’re considering taking out a loan to invest in debt instruments, reconsider. The returns on debt products like bonds and debentures will be far lower than the interest you’ll pay on a loan. use your savings and not take a loan for the same.
The concept of Good loan vs bad loan is subjective. It could change based on several criterions. Learning basics of loans and Analyzing about type of loan could help take better decisions.
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