You have many dreams like going on a foreign trip, buying a fast car or a dream house and so on. But, not all of your dreams can be fulfilled, without availing loans. Many people just avail a loan without thinking about the consequences and end up falling into the loan trap. So, before applying for the loan, you must know whether you are availing a good loan or a bad loan. Now let's understand the difference between a good loan and bad loan.
What is the difference between a good loan and a bad loan?
Taking a loan can never be considered a good idea, but in some cases, you must avail a loan if you want to build an asset. Good loans are those which help build assets over time and you enjoy value from them. Education loan, home loan and business loan are considered as good loans.
1. Home Loan
Availing a home loan is considered a good loan. This is because the value of the asset increases over time and you can also avail the tax benefit on the principal amount of the home loan and on the interest paid. If you avail a home loan for the second house, which you are planning to rent out, this is also considered a good loan.
2. Education Loan
Education loan is considered as a good loan, as it enhances the earning ability in your career. Education loan is availed for completing education and to be financially independent.
3. Business loan
The business loan is considered as a good loan, as it helps to grow and expand your business. You will soon enjoy the profits of this loan.
Bad loans are loans which are incurred to purchase depreciating assets or go on a foreign trip and so on. Bad loans will destroy your financial health.
1. Credit Card
Credit card debt is regarded as a bad debt, as the rate of interest charged on outstanding balance is very high. People often use credit cards to buy luxurious things, but instead of doing this, you can save money and buy what you want, at one go.
2. Auto loans
If you really need a car to travel from one place to another (like home to office), then the loan you take for purchasing a car is considered as a good loan. In case you buy a car just because your neighbor has bought it and you don’t need it, than the car loan is considered as a bad loan.
3. Personal loan
A personal loan is an unsecured loan and the interest charged is quite high as it is not backed by any collateral. If you avail a personal loan for going on a foreign trip/vacation, then it is considered a bad loan. You must avail a personal loan only if you really need it.