Why You Should Avoid Taking Loans To Fulfil Your Financial Goals
Jun 08, 2019

Author: Divya Grover

(Image source: photo created by Waewkidja - www.freepik.com)

Taking a loan to fulfil your wants or needs is a temporary fix to your financial crunch.

Loans are really attractive because it's easy access to money for an impulsive high-end purchase, or to fulfil a life goal like buying a car or house, or when faced with a medical emergency.

As a business strategy, banks and other financial institutions present tempting offers on loans, such as interest-free equated monthly instalments (EMI). Since the amount can be paid back in due course of time, customers avail of a loan, sometimes more than one, to buy things they don't 'need' or things they can't afford.

What is absolutely misleading is there is no such thing as 'interest-free EMI'. And people don't realise that the interest rate cost is already embedded in the principal amount.

You realise the extent of a loan's burden once you start paying EMIs. The interest rate on loans is high and this can disrupt your budget. You end up paying more than the actual cost, i.e. the principal amount plus the interest. Sometimes the cost could run up to more than you can afford.

The biggest downside of taking a loan/s is that it ends up eating into your income and future needs. For example, if you take a loan to purchase a car, most of your income will be diverted towards the instalments. You will thus end up having low corpus for other important financial goals, such as retirement.

Sometimes interest rates are cheaper if the banks lower the rates, which might make loan seem like an attractive proposition. However, do note that the interest rate is not fixed and it could be raised in the future.

In case you delay or default in your payments, you have to pay extra in the form of penalty for the delay or default. This has a negative impact on your credit score and it will affect your eligibility to apply for loans in the future.

These reasons become a cause of stress for many loan takers. It is better for your financial health to avoid taking loans to fulfil your financial goals.

What can you do instead?

First of all, you will need to get in to the habit of budgeting, saving, and investing. Generally, there is a considerable time-gap between when we start thinking about achieving the goal, to the time we actually act on achieving the goal, and till we ultimately achieve it. This gives you enough time to plan its financial aspects.

[Read: Are You Paying Attention To Your Financial Fitness?]

Clearly define your various short, medium and long-term goals. You can then determine the amount needed for each goal. This amount helps you work out how much you will need to save each month. If you feel you cannot afford the monthly saving, you could probably delay some of the goals.

The amount you save should be invested across different asset classes so that it can appreciate your wealth as well as counter inflation. Some investment avenues generate higher returns than others; however, the risk involved will be higher too. Therefore, select the investment avenue based on your goals, income, expenses, time horizon to goal, and your risk appetite.

One of the best ways to achieve your goals is to invest in mutual funds through Systematic investment plan (SIP). It allows you to invest a fixed amount regularly which enables you to follow a disciplined approach towards investment. By investing through SIP, you can benefit from averaging of cost over time and the power of compounding.

If you are willing to take higher risks, you can invest in equity-oriented mutual funds that can give you better returns in the long-term. However, if you wish to follow a slightly conservative approach, you can diversify your investment across hybrid funds, liquid/overnight funds, and short and medium term debt funds.

Whenever there is an increase in your income or if you have investible surplus you can use it to increase your SIP. By doing so you ensure that you have a big enough corpus to fulfil your goals.

[Read: How Stepping Up SIP Every Year Gives A Boost To Your Wealth]

To make sure that your portfolio is on the right path to achieve your goals, select the right funds by evaluating each one on quantitative and qualitative parameters. Additionally, review your portfolio at least once a year to track its performance and make the necessary changes.

You can consult an investment adviser so that you manage your finances more efficiently and become financially healthy.

Editor's note:  Have you secured your Family's Financial Future?

PersonalFN can assist you to plan your life goals like:

✔ Children's Education

✔ Children's Marriage

✔ Dream House

✔ Retirement

For your dreams to convert into reality, there's no other alternative to effective planning. Click Here to Schedule a Call with our Investment Advisor!

Happy investing!

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