Differentiate good from bad loans to settle debt-free

Nov. 11, 2010 - PRLog -- It is general facts that any borrow may result in a debt trap. But this is not always true. A loan which leads to the creation of an asset is not bad, provided the quantum of loan should be within the repaying capacity of the person. However, a person should first develop an understanding to separate good loans from bad ones.

Personal Loan: You should go for a personal loan only if there is a crisis, as the rate of interest is more than 15% in addition to the processing fees. The rate of interest can be negotiated further by offering collateral and furnishing details of credit strength, income flows, etc. Avoid using such loan for personal consumption like buying durables, or going on a vacation. In contrast to personal loans, there are other cheaper loans available, e.g. loan against securities, gold and property, which can be effectively used. You can avail of such loans against a collateral at rates that are 5-15% lower than those charged by personal loans. The repayment tenure is also longer than a personal loan.
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Car Loan: The automobile can depreciate faster than the outstanding loan amount. An automobile is also an asset (though it does not generate income and depreciates in value unlike property). Looking at this, the tenure of the car loan should be short, say 3-5 years. The unusually high processing charges should be avoided as they add to the overall cost of finance. The pre-payment penalty clause should be negotiated to avoid unnecessary charges if the loan is foreclosed.

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