Loan! A cancer to your Investment

It is like a sword hanging over your head. It is the biggest stumbling block in your investments. Benjamin Franklin famously quoted “Rather go to bed supperless, than rise in debt”. I am talking about loans which is offered to you at a drop of a hat by financial institutions. When a person ran into debt he was considered a true American but I guess we Indians are also joining the band wagon of the west. I literally fell off my chairwhen I last heard that even apparels and cloths are also available on EMI’s.

In my advisor career, on more than a few occasions I have refused to accept client’s investments because they have been very callous towards their bloating loans and refuse to prioritise foreclosing their debts. Irrespective of the amount you invest, if your liabilities exceed your savings then you are inviting trouble because your net worth is negative. It is like putting the cart before the horse.

A few pointers on loans and ways to close it:

My biggest sigh of relief was when I proudly walked into the bank to collect my property documents since I had closed my loan and the house was now officially mine. It was like a big elephant off my chest. Foreclosure of loans not only releases a big burden off your shoulders but also ensures the asset is yours, until then it belongs to the lender. Please remember, you don’t own the asset until you pay off all your debts.

Take a closer look at the principle and interest component of your EMI, you will be surprised that in the initial stage the interest constitutes more than 70% of your instalment. Hence, the interest is manifolds higher than the actual rate. This is exactly the reason how lenders juice out the maximum revenues from your loans during the initial few years of the tenure.

EMI’s like worm’s nibble into your savings considering the instalment you are obliged to pay every month. This simply delays your investment plan for long term wealth creation. Also, remember that loans add up to the overall cost of your asset purchase.

Prepayment/ foreclosing of loans can be done either by reducing the tenure of the EMI and increasing your instalment amount or by paying lump-sum amounts intermittently towards prepayment.

Loan certainly helps you attain your goals in life but if you prolong it for a long period it can sabotage your wealth. It is like cow dung, the longer you pile it the stronger is the stench. So, if you want a good night sleep, if you want to create wealth andensure your family is not enslaved with liabilities in dire circumstances then prioritize closing your loans.

On a lighter note, our king of good times who seems to be absconding has a clear message for all of us “ If I owe you some money, I have a problem but if I owe you billions, then the problem is yours”