If you’re a young salary earner, there’s a good chance you’re being stalked by people wanting to lend you money. You are likely being spammed via phone, email and SMS with loan offers from banks and NBFCs. When you log on to buy anything, you get offers to take ‘instant’ or ‘interest-free’ loans that can be processed in minutes.  

But if you give in to this temptation, you’ll soon find yourself neck-deep in EMIs. While deciding to take a loan, you need to make a distinction between good, bad and terrible loans.  

Good loans  

Are there actually good loans? Your parents always told you never to borrow! Yes, a loan can turn out to be good for you, if it helps you acquire something that either adds to your income or to your wealth.  

You’re working, write the CAT and have bagged an admission into IIM Bangalore. If you can’t afford the fee of Rs 24.5 lakh, taking a loan to fund the course is a good decision. This is because acquiring a PGDM from IIMB will substantially lift your earning capacity, for all time to come. An education loan is usually a good loan, because it is an investment in your skills that pays off in terms of a better career and income. But the course you’re taking needs to have a good ROI (Return on Investment), to make up for the interest you’re shelling out.  

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Sometimes you take a loan to jump-start your wealth creation. A loan to buy a plot of land or a home in a great location can turn out to be good, because you’re investing in a tangible, appreciating asset.  

What about a loan to buy a share? That’s more risky because you don’t know if the share will halve or double over time. If it halves, you will be stuck with EMIs, without much to show for it.  The trick here is to make sure that the returns you earn make up for the interest you’re paying the lender.  

Bad loans 

When signing up for loans, most folks don’t actually add up the EMIs or Equated Monthly Instalments (EMIs) to see their total payouts to the bank.  

If you take a ₹15 lakh car loan at 13 per cent for 7 years (EMI Rs 20758), you will actually be paying the bank ₹22.92 lakh in total. A personal loan of ₹5 lakh at 11 per cent for 5 years (EMI of Rs 10,871) actually costs you ₹6.52 lakh.  This is why the only good loans are those where the asset you acquired can give you returns that more than compensate for the interest you pay.   

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In an ideal life, you should only spend on what you can afford with your savings. But often, life throws us googlies which require us to stretch our budget. You have bagged a great job in a new city and need a bike for your commute. You don’t have the Rs 1.5 lakh you need to buy the Bajaj Pulsar you’ve been eyeing. Yes, in the interests of getting to work on time, you may need to take a loan. This isn’t a good loan exactly because you’ve bought a depreciating asset. If you decide to sell the Pulsar after 5 years, you’d probably get much less than your buy price.   

If you just got married and need to furnish your home with bare essentials, pay security deposit to your landlord or spend on a health emergency, you may need to take loans. They aren’t good for you, but they can’t be characterised as luxuries either.  

Terrible loans  

So what loans would fall into the category of terrible? There could be three types.   

1.Loans that don’t fund assets but fund luxuries and experiences. What’s wrong with taking a loan for a vacation in Spain, you may ask. Well, one of the cardinal rules to getting rich is to practise delayed gratification. If you simply cannot wait to have the experiences or things you want, until you earn enough to afford them, you’ll be borrowing all the time and living in a debt trap. It’s not a pleasant experience to be paying EMIs until 2028 for a one-week trip you took in 2024!   

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2. Loans to keep up with peers. If you’re spending on experiences and things you don’t really want, to look good in the eyes of your friends or social media followers, that’s a slippery slope. You may end up paying EMIs for stuff you didn’t even enjoy! 

3. Loans to make ends meet. If your spending habits have gotten you into a situation where your wallet is empty by mid-month and you regularly to borrow to buy groceries or eat out, that’s not the sign of a wrong decision but an addiction to loans. If you’re in this situation, its time to de-addict. Tighten your belt, put a stop to all borrowings and focus on repayments.