Thursday, June 18, 2015

Loan changes life! Is it for Better or for worse?

One of the finance companies these days advertises its loans, where the punch line is, 'jab zindagi badalni ho.' This line is really very powerful. Loan is a good innovation for the purpose of meeting immediate expenses against deferred income. The subject of finance ' be it corporate finance or personal finance ' is about management of cash flows. We have certain expenses to be funded and we earn some income. With money being the medium of exchange, it is possible to manage and smooth out all the gaps in inflows and outflows. We invest the surplus and spend later, or take on debt to spend now and pay later.

Debt can change life. And that's where the tagline of the ad was quite impressive. However, like everything else in life, debt is also a good thing if taken in moderation. If excessive debt is taken, that can also change life ' on the lighter note, the ad's punch line will still remain true.

How much is sufficient? Well, it depends on how much you earn and how much you spend. The debt has to be repaid, and is repaid out of one's future earnings.

One of the main features of capitalism is that earning is becoming difficult by the day whereas spending is becoming easier. Too much competition in all areas is making it difficult for all to earn and increase earnings. It is difficult for individuals and it is difficult for companies.

As companies find it difficult to sell their goods, they make buying convenient and tempting by offering freebies and easy loans. If one succumbs to temptation too often, one would end up piling on too much debt.

This debt has to be repaid in future and that can change life. There have been many cases of people taking on too much debt and then the course of life changes ' one gets stuck in a job one does not like ' one tries to enhance investment returns through by taking on large risks ' one tries to take short cuts in order to enhance earnings, these shortcuts may not be correct for the customer or in the eye of the regulators.

Before taking on debt, it could be a good idea to visit a financial planner and get your ability to service debt checked. The planner will look at your income and expense levels and patterns and work some numbers. This exercise is similar to what a housing finance company does before sanctioning a loan. The same may not be true in case you are taking loans against securities or loan against gold. It is always in your interest to get the check done.

'Badlo Zindagi' ' but ensure it changes for better and not worse. Use loans wisely.

-  Amit Trivedi

The author runs Karmayog Knowledge Academy. Views expressed here are his personal views. He can be reached at .

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