How to Make Loans Purr for You

By ketkih | June 16, 2015

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Just like your furry 4-pawed attention seeking cat, loans can be your friends too.

What do they have in common? Just like your cat sulks right out of your reach when she doesn’t get her way, loans need to be handled correctly for them to work right for you.
They are double-edged swords; if wielded carefully, you won’t be injured (or scratched, as the case might be).

 

Loans help Capital Appreciation

Satheesh’s grandpa, with his constant advice of ‘no pain no gain’, was urging him to do something, not have just short term goals and invest right. The techie weighed his options. Keeping an eye on capital appreciation, he decided to take a home loan and buy a property. After taking a bit from his savings and taking a lot from the bank, Satheesh bought a property for 50 lakhs.

Is it worthwhile? A ringside view would help.

Satheesh has taken a loan of 30 lakhs for 10 years, at a rate of 10 %. Thus the interest cap after ten years would be Rs 17.57 lakhs. This takes the total cost of the deal to Rs 67.5 lakhs.

Now let’s assume that the value of property reached Rs 85 lakhs after five years. Here the loan helped him pocket a profit of Rs 17.5 lakhs in just 10 years. So cool! Right?

But he should reinvest the profits judiciously to ward off capital gains.

A note of caution here is to invest in assets which can give you capital appreciation. So if you are taking a big loan to buy a dream car, its price depreciation will milk you (no pun intended).

Loans get you Tax Benefits

Who doesn’t like a tax benefit? Home loans and education loans can ring in loads of them. Here in our case, Satheesh gets a tax benefit of Rs.1.5 lakhs under Section 80 C, and up to 2 lakhs on the interest paid, under Section 24B.

For education loans, you get a waiver of the interest paid during the financial year. And car loans, if you are an entrepreneur and if the vehicle is taken in the name of your firm, can get you tax benefits too!

There are some that take loans just to avail tax benefits, just like your cat who won’t stop asking for food every 15 minutes.

Loans make you Financially Disciplined

If you have certain financial commitments, you would think twice before splurging your money. Here, Satheesh’s Grandpa knew that his spendthrift grandson would be more careful if he had an obligation.

So loans can provide you with the much-needed financial planning.

Surprised? Don’t be.

What if you have Rs 20,000 for your expenses? Chances are that the whole amount could be used up in no time. What if you have an EMI of Rs 5,000? Then the expenditure would be limited to Rs 15,000 one way or the other. This is because you don’t want to mess up your credit score intentionally.

When one is pushed to the wall there isn’t much of a choice. You would cut down on your expenses to fulfill the credit commitments and that ushers in discipline in your spending.

By putting a regulator on your expenses, you are acquiring an asset- a home or land, which would augur well in future. So, in a way you are saving to gain an asset.
Thinking of how you had to toilet train your cat?

Loans build Capital Value

“No sword can behead the king of knowledge”. Education loans can be dear friends indeed and help you build capital value through a fulfilling career. You get to fund your education needs at the institute of your choice.

And it brings with it tax savings as well during the initial years of your career, when you have no other investments.

 

Prudence is necessary when opting for loans. Getting all the right benefits from your loans is just as pleasing as your purring cat curling up next you.

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