Taking a loan is a scary notion. The burden of debt, monthly EMIs, interests way heavy on a person’s mind, and usually deters them from taking a loan.
If you have enough savings to buy a car or a house, taking a loan doesn’t make sense to many. It feels costlier than using up your savings.
No debt is a good debt is a myth that is widely believed by people who are strictly against taking a loan.
However, let us see why this thought is not completely true.
INVEST YOUR SAVINGS
Suppose that you want to buy a car of INR 10, 00,000/-. You have two ways to pay for it:
1. Remove INR 10, 00,000 from your investments or
2. Take a loan of INR 10, 00,000/-
If you deploy the entire amount to buy the car, you have a depreciating asset with you and your investment earnings go down.
Now let us consider that instead of deploying your savings to make the purchase you take a loan of INR 10,00,000/-to buy the car at an interest rate of 7% payable for 3 years
Thus, if you take a loan and keep your savings invested you end up earning a net of 3% interest on INR 10, 00,000/-
FINANCIAL DISCIPLINE IS MUST
Taking a loan requires discipline in managing the expenses, to maintain the investments and repay EMIs on a timely basis. You don’t want late penalty charges or financial distress.
Aside from the debt, it will also affect the credit rating and make it difficult to take loans in future. If you are controlling your expenses and regularly investing & budgeting, borrowed capital can be a good way to build assets.
TAX BENEFITS
Reduced tax burden is another benefit of taking a loan. The interest cost of a loan reduces the taxable income and curbs down the tax amount.
Thus, a person can save a considerable amount as tax when taking a loan and can offset the cost of interest by making use of the several deductions in the Income Tax Act of India related to loans.
CONCLUSION
Taking a loan, financial discipline, and investments go hand-in-hand for successful utilization of borrowed capital and efficient & stress-free repayment of debt.
