The pursuit of material happiness has almost become a national obsession. In the early nineties, the myth of the 'Indian middle-class consumer' was born. And though reams after reams were printed on how this segment will drive consumerism, the actual spending is only being seen in the last few years. So much so that every foreign brand is making a beeline to enter this country.
This consumerism is also epitomised by sheer peer pressure. That is, 'Keeping up with the Joshis' is perhaps more important than saving for the future. While earlier, the parameters of the 'well-to-do' included microwave ovens, washing machines and DVD players, now foreign holidays, expensive restaurants and club memberships are in vogue. As you would realise, goods or collaterals are being fast replaced by high-cost services.
In other words, 'instant gratification' is the new mantra. And since your friendly neighbourhood banker is always there to fund that dream, you are willing to take more risks.
But before taking that plunge, one needs to realise that there are some things that justify taking a loan, while for others, there is no reason to do it. And the list of 'there is no reason to' is increasing exponentially these days. Let us look at the list of the good, the bad and the ugly loans.
The 'Good' list
Housing loan: These have gained in popularity since 2001, on the back of falling interest rates and increased demand for housing. At present, we are in a rising interest rate regime.
However, we still advocate that you go in for one, in case you want to switch from a rented to an owned house. But, remember that these are long tenure loans and hence strictly adhere to certain prudent financial ratios (such as EMI to monthly income ratio of 30 per cent or less) so that you are not financially overstretched.
You could either opt for a fixed rate loan at 13-14 per cent or a floating rate loan at 10.5-12 per cent. Currently, the EMI per lakh (tenure: 120 months and interest rate of 11 per cent) stands at around Rs 1380.
Educational loan: Borrowing for this purpose can qualify under the 'permissible' category. Such loans are available to all Indian nationals who have secured admission to a professional or technical course in eligible Indian or foreign universities.
The eligible courses include graduation and post-graduation courses, masters and PhD courses. The loan amounts can go up to Rs 750,000 for studies in India and up to Rs 15 lakh (Rs 1.5 million) for studies abroad. Such loans require margin payment as well as guarantors and enjoy a repayment moratorium during the period and up to one year after getting a job, whichever is earlier.
The repayment period is five-seven years after start of repayment. The current rates on such loans are between 11.5 per cent and 14 per cent depending upon the tenure and the amount borrowed.
The 'Bad' list
Consumer durable loans: Yes, that laptop is good looking but hey, it will cost you an interest of over 14 per cent per annum. Think of that and wait till you can afford it.
Vehicle loans: The new Toyota Corolla would look great in your office compound. It may even give your vice-president some blushes. But then it also comes at an annual interest rate of 15 per cent.
And while you may think that you are creating an asset, once it is out on the road, the value starts depreciating faster than your speedometer. Interestingly, most of the borrowing takes place in the high-end cars, which clearly indicates that people are living beyond their means.
Personal loans: These are unsecured loans. You can procure these merely by producing your latest salary slip, your credit card bill, or perhaps even your visiting card! However, these loans are relatively more expensive with annual interest rates being as high as 22 per cent or more, as no collateral or guarantors are required.
Many people opt for such loans for frivolous purposes such as purchase of mobile phones or other consumer electronics. Surely, these products are not worth procuring at such a high interest rate. Opt for such loans only to tide over some emergency. Use them only as a last resort.
The 'Ugly' list
Holiday/travel loans: This is the new kid on the block and wins the gold medal for frivolity. "Travel around the world at only Rs 2,000 per month." And no one knows how many of these months you would be shelling out for that one single trip.
Credit Card cash withdrawals: Borrowing cash from the ATM can be very expensive with rates going up to 40 per cent. Avoid at all costs.
Loans against securities and gold: While these are cheaper, they also come at the price of pledging your family silver for it. Remember that while some emotions can be priceless, for everything else there needn't be an EMI.
The writer is vice president, Parag Parikh Financial Services.
