Growing up, we were always taught that being indebted is a bad thing, but frankly, it sometimes pays to question age old wisdom. Debt is bad only when it goes beyond your control, such as a credit card outstanding balance. There are definitely a few instances when debt can be helpful and in fact preferable because it gives you benefits that would not be possible if you used only your savings to fund something. The following are four such instances, where debt can be advantageous as opposed to using your savings or a related option.
1. Home Loan
Purchasing your own house is a dream and it is definitely not easy considering the skyrocketing property prices in India. With this in mind, you do have the option of mortgaging other assets to take a loan for the home purchase, but a home loan is definitely more suitable. For starters, you get tax rebate on home loan EMIs, you can avail tax benefits for buying a flat or house. A great aspect of home loan is that you get to build an asset. Imagine how much that property will be worth some years later, say 5-10 years! That appreciation in value itself is the biggest benefit of a home loan.
2. Education Loan
Similar to property, education costs have increased for both domestic as well as international students pursuing courses abroad. So much so that parents have to think long and hard regarding how to finance such costs. Getting an education loan is relatively easy as long as the primary applicant (student) has a co-signor such as a parent/guardian, a sufficiently good academic track record and a letter of acceptance from a recognized educational institute. In case of higher loan amounts, collateral and third-party guarantor are mandatory. In case of an education loan, the primary applicant can benefit from tax exemptions on the EMI paid in lieu of the loan. Additionally, higher educational qualification at a leading educational institute translates to a higher pay (depending on the student’s grades of course).
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3. Business Loan
There is a saying in finance, “debt is cheaper than equity” and a business loan is the perfect example of a debt that can be cheaper than equity. When a business faces liquidity issues, the owner has two options – get an investor to purchase a stake in the company (equity sale) or take a business loan. In the long term, sale of equity leads to sharing of profit by the co-owner. This often costs the business owner more than the interest on a business loan; hence, financial experts agree that a business loan is good and in fact preferable.
4. Secured Loans
The opinion is divided with respect to the possible benefits of secured loans i.e. loans that require collateral example loan against property or gold loan. On the positive side, these loan types boast of having some of the lowest possible interest rates. They can be an ideal option if you are in financial distress and need a loan that you can repay in the future when your cash flow returns to normal. Though not recommended, you could potentially use the money from these loans to invest in your own business or other ventures to make a profit, provided the rate of return is greater than the loan’s interest rate. A major pitfall of secured loans is that you stand to lose the asset used as collateral if you are not able to repay the loan within the tenure specified by the lending institution.