Consolidate private loan
Category : Finance Issues
Does it really make sense to get debt free always?
One big issue many of us face today is whether to pay off our debts or make new investments. Off course,this is a part of loan consolidation.This is really very tricky thing.Does it really make sense to get debt free always?Is it worth to repay existing debts with the use of surplus cash and not using the money in the existing profitable portfolios.Sometimes, debts also can fetch us many benefits in financial perspective. Also, conservative individual may differ with this.
This primarily happens when we have some surplus cash and contemplating to pay off some debts or make some new investments.This is becoming a real dilemma in current market scenario.In this situations, we should not take any emotional decisions rather than a logical one.One should not bear in mind that by paying off his debts he is free from all his liabilities.This is absolutely a wrong idea.Rather , he should look at it from finance parlance i.e. Opportunity cost.
In simple words, one must think that if he is paying a finance charges of 10% for all his debts and his investments are earning him 12% ,why he would contemplate to pay off all his debts.The principle is when the Expected Return is greater than Finance Charges by more than 2% (E.R>=F.C) we should not pay our debts and rather we should park in the extra money to new investments or the existing ones.
However, if an individual is going through this phase of paying debts vs making new investments with surplus cash, he ought to take that decision after going through the following factors.
For long tenure loan like housing loan,if the tenure of any housing loan is say 20 years and one is paying a home loan interest of 10% and his existing earning from equities are say 12-15%, he should continue with this loan and the surplus money should be invested in equities so that the new investment would help him to pay off his loan either in part or full after 8-10 years. Thus, the principle should be when ever the debt tenure is more than 3-5 years and if the existing investment is earning more than what you are paying for your debts, you should not pay off your debts.
Cost of loans:
The cost of loans i.e. interest payment for debts against the existing earnings should also be considered as one of the decisive factors.If the interest rate for any short time debt say for 1 year is 12% and in that case this debt should be paid off since the earning more than 12% from existing equity investments portfolio for a short time of 1 year may not be guaranteed and from fixed instrument portfolio this earning of 12% is not possible any more;
There are certain loans which offer tax benefits to the customers viz;House building loan, business purpose loan. In that case an individual can avail the tax benefit for paying EMIs on HBL. Also , in case of business loan one can get tax advantage due to loan interest being charged to P&L A/C. Thus, in these type of loans one should continue with the existing debts and should not be paid it off with the surplus money.
Last but not the least, everyone should keep one thing in mind that finance experts suggest that total loan repayment outgo in one month should not exceed more than 40-50% of the monthly income.Only following this kind of strong principle we may sustain with existing debts for a longer period and enjoy the aforementioned benefits .Debts are not always bad for one’s financial health.
Also, this principle may differ from person to person depending upon their financial health and existing wealth scenarios.
Disclaimer: This is completely our personal opinion.Finance-Gyan may not be held responsible for any of its posting.Readers’ discretion is solicited.
” Happy Reading”