Taking out a loan comes with some financial risks. Any loan has the potential to be good or bad. The advantages and disadvantages of a specific loan are based on the kind of loan.
A good loan is considered a productive asset beneficial for education, business or home purposes. For instance, a student loan enables a person to consider the stream they desire within higher education. So, it can be considered a boost towards financial stability. Bad loans or bad debts are used for purchasing something trivial, basically for consumption. These include car loans, shopping, marriage, and other related reasons. They do not create any assets and affect your financial stability.
A benefit of a loan is that it can help build assets. Some examples of this are: A business loan is productive because it aids in expansion and maintains cash flow. It also helps solidify financial stability within the company. An education loan can help students build their careers and secure a job.
Loans usually require you to provide an asset or collateral, something the lender can seize if the person cannot pay off the debt. This collateral can be a car, property, or home that holds some value. On the other hand, personal loans can be taken without providing any collateral and hence are known as unsecured loans. In this case, money can be borrowed for any reason, a vacation, new appliance, medical bill, or marriage. Here you pay back the money, including interest in monthly installments for two to five years. The interest you pay is expressed as an annual percentage rate (APR) which ranges from 6% to 36%, depending upon your creditworthiness. In the best cases, the loan depends upon your and your purpose. But some personal loans may include collateral.
Loans can be a boon as well as a bane. When taken for the right reasons and handled with proper care, loans can become a bridge to build assets. Additionally, they can also be helpful in times of need, such as medical situations. However, when mismanaged, a loan can become a source of prolonged economic instability. A loan should be taken, keeping all factors in mind. Taking loans for luxury purposes and consumption should be avoided. Your loan can be good as well as bad. It all depends on how you handle it.
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