Loans are good or bad?

Most of us have taken loan but we don’t know how to classify the loans whether it is good or bad?

A loan which adds to your earning capacity or taken for increasing productive skills then it can be classified as good loan. In case a loan is taken to meet some emergency must not be classified because it is must it cannot be good or bad.

For classification of loan the purpose for which it is being taken is important. Therefore the other deciding factor is the cost.

The cost effectiveness of the loan is related to the purpose for which you are taking loan. The education loan taken for higher studies or the student is from poor family and cannot continue his school; this loan is classified as good because this will generate significant earning capacity in relation to their cost and are available at a low interest rate. On these loans there is tax reduction facility which reduces the post tax of the loan.

The second purpose can be loan taken to fund the cost of your own residence such as renovation or adding a floor. Usually the price of this asset increases in value and will be the source of pension income or retirement by means of reverse mortgage.

The third purpose can be to buy a vehicle reasonably priced. This can add up in your productivity which is getting low because of the bad condition of public transportation in most of the cities in India.

Another reason for taking loan can be for funding expensive/luxury consumer items. With the booming of malls there has been increase in the usage of plastic money which means more and more swipe giving rise to more and more debt.

Then the credit cards having high debt for longer duration can land you in a financial crisis. Thus the loan against credit card should not be more than 30-45 days, as bank charge high interest on this.

Some people take loan for tentative purposes such as for investment in stock market. This is not right this can put you in miserable situation. Whenever there is set back in the share market you might face a great loss, such situation came in the last fiscal year when there was global economic crisis.

Hence before taking loan keep in mind these points which can help you in taking the right decision.