Less is More!!
In the series of “Less is More” Today we will discuss “More
Liabilities”
India is known to be country of great savers (unfortunately
not great money managers). So its likely that when it comes to borrowing,
Indians borrow less and are also inexperienced. When you borrow you create
liability. That’s what we will discuss today!!
Borrowing are mainly of 2 types- Borrowing for asset
creation and borrowing for spending.
Borrowing for Asset creation can be Home Loan, Loan for
Investing in Equity/MFs, Lease rent discounting, Education loan (I call it
asset creating because eventually education loan will help family to earn more
and therefore create assets), Home Improvement loans provided it improves the durability/life
of the structure. Money spent on Interior decoration is not asset creating.
Borrowing for spending can be marriage loan, vacation loan,
consumer loan and Vehicle loan (if its not used for enhancing productivity) as
vehicle are depreciating asset and yields lower resale value with age, mileage,
updates and tech obsolescence.
From financial wisdom view point, asset creating loans
are good, and borrowing to spend may not be wise.
Asset creating loans can be bad if the cost of borrowing is
high and underlying asset outlook is weak. For example – People who took loans
for buying properties over last 5-8 yrs!! These investors have hardly made
money in property appreciation over the interest cost payment. This is double
whammy- you paid interest and blocked money in asset class which didn’t grow in
5-8 yrs, therefore missed opportunity in creating wealth in other asset class
also😢.
By and large any loans taken for real estate as an asset class has
proved to be poor decision for investors during this period.
Loan taken for
investing in Equity or MF is also avoidable!! As your Interest outgo is
fixed and return outlook is volatile. Also not having own money seldom makes
you long term investor and risk appetite also falls. Unless you are novice
investor, you should avoid it.
Indians have another mentality of switching loans from one
to another lender!! While you may do it, be aware of the fine prints before you
jump. Examine all term and conditions before you sign up. Verify all claims of
the sales person with the company for “dudh ka dudh paani ka paani”.
Investor must try and keep his loan book very small and
short term. You may also deal with only 1 or 2 lenders instead of many lenders.
Look for service quality and transparency also besides lower rate.
Home loans are the cheapest loan available with tax benefits
(Income Tax conditions are to be met) therefore investors may not opt for pre-closure
or advance payments. Home loans are cheaper but loan against house is expensive
therefore its good to run loan for full tenure. I see people repay their home
loan before term, which should be avoided if possible.
Lets examine borrowing for spending!! Any loan taken now is cutting your ability to consume or invest in
future. If you understand this line you are prudent. People take loans
for practically everything these days. This leads to culture of buy now and pay
later. Even if you are getting interest free loan, you need not take it as will
lead to habit and eventually you may be victim of overspending and upset your
financial wellbeing. Know what you need and finance the same thru own
resources. Spending is impulsive in nature and have seen many people burdened
with loans. Avoid it please🙏 . If you
borrow more and miss even 1 installment, you credit score will be hampered. I am
sure that in times to come, your credit score will decide you interest rate
also. So higher credit score, lower interest rate😊.
What should you do?
1)
If you have to buy, buy it on credit. Have
strong reasoning and logical decision of consuming.
2)
Buy on credit, only if you can examine if its
really interest free.
3)
Consume only if you can afford. Pay attention to
maintenance as that doesn’t come on credit always.
4)
Never take outstretched loans which can lead to
anxiety in routine life. I know people took hefty loans for swanky house and
are struggling to service or sell the property.
5)
Leverage to invest is art of novice investors. Don’t
you try until you are 100% sure of outcomes.
6)
While taking long term loans, make sure that you
have enough liquid assets to repay that debt. Also note that EMI should be
easily serviceable.
I am personally having zero debt!! I am going to take home loan for
bigger house in some time. I will also take term plan for the full loan amount
so that, if something happens to me, Insurance cover can take care of my
outstanding loan and home need not be liquidated. My loan amount is going to be
two times of Annual Income.
Debt is double edged sword. It has
trapped many business tycoons and countries too. Be wise.
If you need any assistance on what and why’s of Debt, feel
free to contact me. I am available at 9833778887 or wealthcarein@gmail.com
If you find our blogs helpful, pls do like, share and
comment
Author –
Bhavesh D
Damania
Founder -
Wealthcare Investments
EduPrenuer,
TV show panellist and Blogger
"Risk comes until you know what, where and why you are
Investing"
Disclaimer: We respect all individual approaches. Sole objective of
this series is to burst a few myth in Investing. There could be genuine
reason/experiences and “less is more” may not be appropriate. Investor must
consult own advisor to figure out right approach before adopting any of these
suggestions.
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