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Know about Good and Bad loans before falling into a debt trap!

Loans are an important part of building social life and reputation. It is important to be in good hands when availing credit in today’s world. It is also a key understanding to avail credit products from organized and regulated sectors to prevent the risk of having to deal with bad lender behaviors. 

This article intends to give definitions of good loans and bad loans. Clearly defining good and bad loans is how one handles finance and repayments. In general, if the loan is taken for the creation of an appreciating asset, it is a good loan with security in case of default. If the loan is directed to buy a depreciating asset, not handling well will make it a bad loan. Here are some of the common examples of good and bad loans. 

Good Loans

Home Loan

The loan offered to purchase an appreciating house is called Home Loan. It is a secured loan in which banks hold the same collateral in case of default. With long tenure, EMIs are affordable across different budget ranges. Employed with an income of Rs.50000/- per month and taking loans with monthly repayments of Rs.60000/- makes even a better credit product a bad one. Home Loan is a low-interest product making it secure as well as an appreciating asset. While availing of the product, make sure that at worst your monthly repayment commitment is less than 50% of your monthly income. 

Business Loan

Working Capital requirements can be met by private financing through organized sectors like banks and Non-banking Finance Companies (NBFCs). Growing business needs continued funding support for manpower, machinery, and working capital. Unless the business is distressed, this loan is a better step to meet the financial requirements of running your business. Along with the growth of the company, avail low-interest benefits to cut the financing costs. For a sustainable business with good cash flow, the loan repayments won’t be a big burden on expense accounts. 

Education Loan

It is the most overlooked credit product offered by banks. Though it cannot be used for asset creation, can help build a career foundation with education. It helps create an asset far above a home, business, or car. Most of all, future security with education. Once graduated, repayment can be easily started without bearing the liability while studying. Education loans come with lower interest rates and the repayment structure is structured towards helping a student successfully repay it.

Bad loans

Personal Loan for recreation

With increasing digital commerce, businesses are offering innovative solutions to make more sales. Likewise, the offer is being extended to financing options as well. The most popular is a Personal Loan with very less turnaround time to disbursement. A personal loan is an unsecured loan carrying a high interest of upto 49% which depends on the applicant’s financial credibility. The unsecured option may be justified as a good loan in hard times like medical emergencies, education needs, etc. But utilizing the same amount for lucrative experiences like holidays, marriage, debt repayment, etc, is not good behavior with a Personal loan. 

Credit card

This postpaid credit instrument is a lifesaver if employed for the right use. Used right, one need not even pay a small interest on the instrument’s utility. If not used well, one can even drown in the hefty interest rates. The minimum interest on different payments on credit cards starts at around 20% per annum. It keeps rising with varying financial credibility on the credit card holder. Though then Credit card gives access to an interest-free credit limit of upto 45 days post which the liability keeps building up. Wrong utilization of a credit card will significantly affect your Credit score and thereby credibility. 

Vehicle Loan

This loan product is both good and bad at the hands of the borrower. Vehicles can be used in two ways. One is personal utility and the other is a commercial utility by businesses. A vehicle is a depreciating asset and it always reduces in value as time passes. Employed for commercial use, the loan payment can be a business expense. When used for personal use without much traveling, the vehicle will start to rust in the parking space while the EMIs keep debited from the account every month meanwhile reducing resale value. 

While one can debate between good and bad loans, the option of making them a bad one or a good one is upto the borrower. When in the lending business, Banks and Finance Companies tend to devise new credit products to sell and thereby make their revenue. For some, it’s good for their circumstances, and for some, it becomes money at their disposal. Getting carried away is not what financial credibility is which will pull you further down into the debt trap. 

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