So what is the difference between good and bad loans? When should one seek for credit?

“Opportunity favours the bold” this is a lesson that I learned early on, and have used to guide the Virgin story.

If somebody offers you an amazing opportunity but you are not sure you can do it, say yes “then learn how to do it later!” Richard Branson

Life presents us with multiple investment opportunities which are time-bound. In most cases, we are not  able to seize the opportunities either out of fear of failure, risk or lack of funds to start off.

The tips below will help you weigh on when to seek credit and when not to.

Good loans are those you take for investment with a higher rate of return than the cost of the loan.

This means that if you take a loan to put up a building, the rate of return should be higher than the interest that you are paying on that loan.

When you take a loan to purchase a piece of land, it is an investment that may not give you instant income but because land appreciates with time, the future benefits are worth the investments and it is, therefore, a good loan.

You can also take a loan to build your own home, start a business which is still a kind of investment as long as you are careful about the kind of returns you will get from the investments.

A good loan should also be short term or medium term.

Long term loans end up tying a person to that debt for a long time limiting the ability to exploit other opportunities.

The longer the duration a loan takes, the higher the cost and the more it ties you from undertaking other major investment projects. A mortgage borders between a good and bad loan depending on one’s ability to pay it off within a short time thereby getting room to focus on other investment projects.; unfortunately the majority of people pay mortgages throughout their working life which ends up being extremely expensive and limits the ability to take up other investment opportunities.

Good loans are taken with a clear purpose and a clear repayment plan.

Before taking a loan be clear on why you need the loan and ensure the whole amount goes to the intended purpose.

Avoid diverting money to other projects not planned for. Have a clear plan on how you intend to service the loan on a regular basis.

Good loans are timely

When you walk your Bank or Sacco for credit, you sure have a financial/ investment need that you want to be met at that time. You might have noticed a prime plot on sale and you want to seize the opportunity; therefore money released a month later might make you lose the opportunity.

Good loans are affordable

One of the major things to consider before taking up a loan is the interest rate. The benefits of an expensive loan may end up being outweighed by the cost of the debt. Look at the interest rates, the pricing and the duration. This will help you make a sound decision on whether to take a loan or not.

Bad loans are what you take for consumption.

This does not necessarily mean spending luxuriously or aimlessly. They are bad loans since they do not have any returns or benefits hence the word consumption. A loan that you take to pay school fees, buy a car for personal use among others fall under this category simply because these are things that you need to plan for since they are not instant emergencies. Instead of taking a loan to pay school fees, plan how to pay school fees.

A loan for a public service vehicle is an investment. It brings in returns unlike the loan for a personal use car.

Taking a loan to pay a hospital bill also falls under a bad loan. There are health covers that help to save for the medical bills in advance. This helps in avoiding to incur a loan that you could have avoided by simply saving for it. It’s better to pay a premium for a medical cover than paying off a loan over the same.

” Impulse loans” are Bad loans

These are loans taken because of their availability other than a genuine need for the money. These include credit cards, mobile loans, borrowing from shylocks or hire purchase. Unless it’s extremely an emergency, it is good to avoid these loans and in unavoidable circumstances, repay them as soon as possible. If you do your calculations on the interest rates, you find that the loans end up being extremely expensive.

Need a friend to help you Plan Smarter so you can Live Better? Talk to us on 0729333444