Loans are good for business because you can borrow money from the bank at 15% rate of interest and make 30% returns in the business.
What if the business takes loan at 15% but make only 10% return? That's a bad financial decision, right?
If you are taking any loan then calculate your returns.
Of course you won't see any returns with a personal loan. You take the costliest loan in the market and spend that money on leasure.
Only home loan and education loan are justified in terms of returns.
Home Loan
- You save money on income tax
- You can rent out the property and earn money
- You can shift to your own home and don't have to pay rent
Education Loan
- You invest in yourself. Your value increases in the job market.
- You can earn more after having a higher degree
- You would repay the education loan from your salary
I would straight away say NO to any other loan.
Can you do the same?
There would always be an alternative to get what you really want without going for EMI route.
For example, if you want to buy a car, get a second hand car rather than buying a new car on EMI. Anyways, car is not an asset. It's value decreases with time.
You can use Uber/Ola instead of owning a car.
But, what if you have taken a loan in some unavoidable emergency situation.
If that was due to hospitalisation of family member then you should have created a safety net - Get a medical & accidental insurance.
There are some options to get the best insurance at the cheapest price that would fit into your budget. We will talk about creating safety net in the next module..
Right now,
Just focus on repaying any existing loans those are eating up your capital.
Can you promise me to become debt-free (Zero Debt) this month?
I have some tips to share with you.
Pay loans in the following priority
Credit Cards
Pay credit card dues first because the interest rates on the credit card is highest (up to 48%).
Shopping EMI
The next costly loan is EMI conversion during shopping or gadgets offered by finance companies like Bajaj Finance. You may be paying anywhere between 18% to 24%. Get rid of that loan.
Personal loan
Personal loans are also in the similar range. Clear your personal loans as soon as possible.
Auto Loan
You can keep your car or bike loan if you have got really a good deal on the interest rates. But if you have money in your bank account then it's better to pay your car loan.
Education Loan
Pay more than your EMI to clear your outstanding education loan fast. Education loan is not as poisonous as personal loan. Plan accordingly.
Home Loan
Home loans are not easy to pay but a balance should be maintained to get the best returns. You can calculate how much do you save on income tax and how much interest portion you are paying to the bank. Home loan should be the last loan to clear.
Tips to repay the debt quickly
Cut your avoidable expenses and use the money to repay your debt quickly
Tip #1
If you have large credit card outstandings then stop using your credit card for a few months and instead use cash till the dues are settled.
Tip #2
If you got a bonus or increments then use that money to repay your toxic loans.
Tip #3
Ask your friends or colleagues if they can lend some money without interest, that you can use to repay the loan back immediately. Do not forget to repay your friend's money.
You should avoid taking any kind of loan in the future. You can create a Faltu Kharcha fund for avoidable expenses.
Take only that much loan that you can manage to repay with your existing income.
The ultimate goal is to be debt-free so that the money can be used to invest in creating long term wealth.
Today's assignment - Make a priority list to repay all your current debts.
From tommorow, we will start Module 2 - Safety Net using Insurance & Emergency Fund.
Thanks,
Pardeep Goyal.
