1. Before taking any loan, we should know interest rate, processing fee, service tax, prepayment penalty, etc. to assess what we will actually spend to repay it.
2. Taking loans against market-linked assets leads to high risk when their values correct significantly during loan period.
3. A simple rule to protect from this risk is that our own money should be at least equal to possible erosion in asset value.
4. A loan is good only if it creates long-term wealth, or positive cash flow, or for a tax advantage, and when taken up to 25% of net carry-home income.
5. A loan is bad if it's used for consumption, doesn't create assets or improve cash flow, adds to expenses without increasing net worth, or is used for buying depreciating assets.
6. Examples of good loans are:
a) Secured loan for first home to live in
b) Education loans for self and kids
c) Secured loan for starting a business
d) Secured loan for a basic vehicle for use
e) Essential consumer durables for home.
7. Examples of bad loans are:
a) Personal loans for consumption
b) Credit card rollover
c) Pensioners' loans of banks
d) Festival, travel and holidaying loans
e) Loans for any luxurious purchases.
2. Taking loans against market-linked assets leads to high risk when their values correct significantly during loan period.
3. A simple rule to protect from this risk is that our own money should be at least equal to possible erosion in asset value.
4. A loan is good only if it creates long-term wealth, or positive cash flow, or for a tax advantage, and when taken up to 25% of net carry-home income.
5. A loan is bad if it's used for consumption, doesn't create assets or improve cash flow, adds to expenses without increasing net worth, or is used for buying depreciating assets.
6. Examples of good loans are:
a) Secured loan for first home to live in
b) Education loans for self and kids
c) Secured loan for starting a business
d) Secured loan for a basic vehicle for use
e) Essential consumer durables for home.
7. Examples of bad loans are:
a) Personal loans for consumption
b) Credit card rollover
c) Pensioners' loans of banks
d) Festival, travel and holidaying loans
e) Loans for any luxurious purchases.