Credit and LoansFinancial LiteracyInvestments

Afraid of Personal Loans: Loans Are Not Bad(2-min read)

Afraid of personal loans? But do you really need them? Loans are not at all bad. If you believe that loans are bad, then you might as well believe that money is the root of all evil.

Loans are not bad. It’s what you do with loans that can make your experience and record bad. Just like money.

Basically, a loan is a sum of money granted to you, and you need to repay it in regular installment terms, usually monthly. And usually, an interest is charged for the loan, so you end up repaying a slightly bigger amount compared to the loan amount, since you also pay for the interest (i.e. the cost of borrowing). This is to charge you with the money you are borrowing, and to help the borrower earn since the borrower is taking a risk in lending to you.

Loans can help individuals and companies meet other financial obligations without disrupting their cash flows. If you have a need now (note: a need, not a want), but money will still be available in the next few months or years even, then you might want to consider getting a loan. Also, big ticket purchases (cars, homes) are best done via loans (instead of shelling out millions one time big time right?) You just have to ensure that you can meet the monthly payments required for the whole life of the loan. Loans can be viewed as forced savings too since you strictly need to set aside an amount, as repayment.

If you can’t or you screw up, then the loan can be bad for you. You will have a blemished financial record that other loan providers can look at, should you need a loan from them in the future. And collectors will surely hunt you down.

But loans handled well give us good financial records. And this means, banks will want to have us as customers, in case we need to loan again someday.

In Bangladesh, loans actually helped improve the economy, and help thousands of lives to improve (see Grameen Bank). This is through microfinancing: small ticket loans to small-time entrepreneurs. Loans can be used as leverage, can be turned into our advantage. And this is a lot better than dole outs. Giving out loans at reasonable interest is more sustainable than giving dole outs. Because we teach them not just to be deserving of the loan, we also teach them to work hard in repaying the loan. A good start for them basically.

We just need to know how to make loans work for us. Similarly, we should know how to make our money work for us.

2 thoughts on “Afraid of Personal Loans: Loans Are Not Bad(2-min read)

Leave a Reply