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A loan means borrowing money to fulfill the dream or urgent requirements. In the process the borrower has to pay an interest along with the principal and the repayment is done over a number of years. Loan can be treated as a bridge between your requirement and your current inability to fulfill it on your own.
Loans can be borrowed to help you to make more money like taking a Business Expansion Loan (Business Loan), Gold Loan, Home Loan, Education Loan rather than short term loans which in turn prove to be a wasteful expenditure like personal loan for holidays, loan for expensive cars, using credit card for shopping. Any loan that generates new sources of income and creates a tangible asset whose value does not decrease over time is considered as a good debt. Everything else which is not is not desirable or needed are bad debts/ loans.
While borrowing a Personals loan the borrower has to pay high interest rates and should be taken only when absolutely necessary. Situations like child education, marriage or any unforeseen condition like bad health may require a personal loan, and is acceptable, as it fulfill the need of that hour. However, people should avoid taking a personal loan for holidays as 7-10 days of enjoyment can lead you to pay an EMI for 2-5 years, which is not a good idea. With interest rates ranging between 15-25%, personal loan for a holiday does not create any wealth or any assets for the future. Holidays are a welcome break from the everyday life and do enrich and broaden perspective. It should not be done at the behest of paying unreasonably high rate of interest.
Many borrowers do not even realize that that spending through Credit Cards is counted as a loan. While using your credit card is not bad if you can payback the entire due amount within the grace period offered by the Bank/ NBFC. Problems occur when the borrower is unable to do so or only pay the minimum due amount. Credit cards also make sense when one wants to avail the benefits of schemes like Cash back and their promotional discounts. Interest on credit card range between 36-45% per annum and if not handled careful, there is always a possibility of falling into a debt trap. Credit card companies give about 30 days of free credit period and expect you to refund the full outstanding amount within the 30-day interest-free period else you will be charged a high interest rate on the due amount. Withdrawing cash and buying petrol are expensive on a credit card, because you will paying interest from the day of the transaction and if you shop and pay via credit card you must ensure that you have to pay the entire amount by the end of the billing cycle. Shifting the payments to the other billing cycle can be very difficult to payback and any new expense spent from the credit card starts putting an additional burden. If you do not use your credit card sensibly, such as paying the monthly installment on time you can be charged over-limit and late-payment fees.
Some borrowers consider auto loan to be a good loan. Lets us understand with examples where cars, trucks and vans are used in the business. The best example of this would be someone who deals in logistics business. For the general public also a car loan is a bad loan because the value of the car starts decreasing as soon as you drive it out of the showroom for the first time. The value keeps on decreasing over the time and does not build any wealth. A car may be great because of its utility, but realize as it will not generate money for you. If that’s not the case you can still qualify for an auto refinance to pay off your old debt and reduce your monthly payment. With some restrictions, still an auto refinance can be a smart way to turn a bad loan into a good loan.
