Rahul was just like any other investor who wanted to become absolutely debt-free. However, he wasn’t aware of the fact that a smart investor understands being debt-free in a different way. After spending a lot of time in the industry, he came across the fact that debt is actually a good thing to have! He then started looking for good debt and this is how he was able to build some wealth by taking good loans. Reducing bad debt is the first important step that an individual needs to take during the asset creation process.
Loans and asset creation do go hand-in-hand. However, you are only able to get good results if you know the difference between a good debt and a bad one.
Good debts are bank loans which you get for your assets that help you make profits. When you take a loan for a large rental property, actually the tenants are paying off the loan on your behalf. This is what a good debt is. In case of a good debt, you don’t have to shed out any money from your pocket for repaying the loan. If you use the income of your business to repay a business loan, then it is known as a good debt.
A Bad Debt
Bad Debts are taken for assets which don’t really produce any profits for you. Good examples of a bad debt would be a television set, a smart phone or a car. These are some of the items that don’t yield any profits for you and you have to pay off the amount from your pocket.
This is the time where a smart investor takes all the points as he purchases a car for cash but starts his business with a loan. He takes a loan to use it on the assets that produce him some income. So, the bottom line is that when you start reducing your bad debts, you are actually starting to build some wealth for yourself. Taking a bank loan is never easy as the interest rate takes a toll on one’s savings. Anyone who wishes to build some wealth and create assets for their business by taking loans can easily do so by planning everything in advance.
Kinds of borrowers
There are two types of people who take bank loans. The first type is those who show either severe dislike or extreme affinity towards taking a debt. The other types are the ones who follow a balanced approach in the process of taking a loan. They usually borrow monetary funds from the bank, but prepay them much before the maturity date. So, it is very important to understand what kind of a borrower you actually are. Taking good debts and repaying them much before the maturity date is a very smart move to make.
Timetable for Prepayment and Repayment
Whenever you take a loan, you got to ensure that you prepare a suitable timetable for repayment and prepayment. There are various borrowers who prefer to prepay the entire amount before the date of maturity. However, you shouldn’t get carried away and instead make a sensible decision considering your budget. The only time when you shouldn’t go for prepayment is when you find money making instrument that offers you really good post-tax returns. This is another great way to build a lot of wealth by investing your money in money making instruments.
Tax benefits should also be taken into consideration when planning to repay a particular loan. One can easily claim a deduction on their income in certain cases if they take a bank loan that satisfies all the conditions laid down in the Act. One needs to make the most out of the tax benefits so that asset creation and loan repayment goes hand in hand.
Never go off the limits
As a borrower, one should always understand their limitations. One needs to take on a decent amount of loan and handle it sensibly. Make wise decisions and avoid stretching your finances if you want to build wealth through a bank loan. Keep your expenses under control and you will surely end up creating some money making assets for your business.
Understand Which Loan to Take and Which Ones to Avoid
A borrower needs to take a loan that helps them in increasing the value of their assets. Try and increase your human capital by taking loans. Taking loans for your business can also prove to be a great idea as you can easily repay the loan through the profits that come out. You should definitely avoid taking any kind of personal loans for consumption. These kinds of loans are non-productive in nature and will yield no income to you. There are several assets that depreciate in value from time to time. You should avoid taking any kind of a loan for buying such assets either.
Hence, loan and asset creation can go hand in hand if they are planned and executed well, keeping in mind one’s current financial position, responsibilities as well as liabilities.