Loans: The good, the bad and the ugly
Most people will need to borrow money at some stage to tide them over in an emergency, to buy larger items or to fund a special event. Before you borrow money, it’s important to understand the type of loan you are going for. It is important to borrow sensibly and avoid some of the pitfalls of borrowing which can lead to problems with debt. It is important for one to differentiate between good loans and bad loans and be wary of ugly loans.
Loans that help you create an asset are good loans. Some of the examples would be a home loan, education. They help create assets and provide advantages or benefits. The benefits may be in the form of additional skills, better career potential as in the case of education loan or tax benefits and rental saving in the case of a home loan.
Loans that are purely consumption-oriented loans such as a personal loan and credit cards are unsecured loans which must be avoided as they come with a high interest rate. These can be termed as bad loans as they often eat into your income and do not help creating any long term benefit for you.
The unsecured loans taken to pay off another loan is when things become ugly as it just deepens the problem by delaying a person from becoming debt free. This is to ensure that one is able to save consistently and meet other needs easily from her regular income. As a rule you should never let loan repayments exceed 40% of your income.
It is also important to develop good borrowing habits, to be able to borrow whenever the need arises.
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