Loans: To Take Or Forsake?

Learn when to take up loans and when to forsake them.

Most of us are paying for some kind of loans. The fresh out of school kid is paying for his study loan, the guy next door is paying for his car loan and the married couple is paying for their housing loan. At some point of our life, we find that taking a loan is inevitable.

So, when do we take up one and when do we say no?

A good starting point would be to ask yourself what is the purpose of the loan. It could be for a new business you are thinking of starting, an MBA you would like to pursue, a car you are mad about, a house your kids would love or that Italian sofa your wife keeps yakking about.

For that new business
Make every effort to determine the profitability of your business (you need the profits to pay off your loan, right?). Talk to your lawyer if you are inexperienced in this. Business ventures should be made with care.

For that MBA
For the career minded, if you are thinking of taking a loan to further your studies (eg. MBA), do some planning. Determine what is the salary difference for those with an MBA and those without. You would need a pay raise to pay off that loan! Check with your employer whether they provide study loans (if they do, they usually have interest rates lower than the banks).

For that sleek convertible
For the car you are mad about, think twice I would say. If you are going to take a huge loan just to get that sleek convertible that your friends are going to wow about, forsake it. After a few months, your convertible would have lost its wow factor and you? You would be strapped with a loan that is going to take you years to repay. Not to mention the amount of money you would have saved for your retirement if you hadn’t taken up that loan.

For that house by the beach
For the house that your kids would love, talk to them. Tell them what they would have to forgo if they want that house. Be it toys, dresses or that latest mobile phone. Give them a week to think about it. Most kids would would go for the mobile phone.

For your wife
For your loving wife’s Italian sofa, offer her something else of equal value but not as useless as an overpriced piece of furniture? Say, get a comfortable normal priced sofa, but invest in a better bed (you spend more time on your bed than your sofa, right?). Still, you shouldn’t be taking loans for furniture. They would have worn out in 2 years but you would still be stuck with your loan. Discuss with your wife what you can afford and what you can’t.

The 3 Golden Rules

1. Before taking a loan, always determine the purpose of that loan. Getting a loan is the fastest way to get cash, but is it worth that long term commitment?

2. If you have taken the loan, repay it as soon as possible. Never take up a new loan to pay for a previous loan or your credit card debts. It adds on and on and doesn’t help the least bit. Seek financial advise if you are twirled in this vicious cycle.

3. Once you have repaid your loans, always think twice before taking up huge loans again.

Some loans are inevitable. Like the housing loan that we need so we can afford a shelter over our head. Take that loan but only for a decent house, not that house by the beach. You can have that when you have accumulated enough wealth to afford it.

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