Life with loans
Question: This is with reference to Balaji Rao's article ‘Consult before you leap' in PropertyPlus last Saturday. Just for the love of reading something on planning one's finances, I read the article, and got interested in knowing something very basic. Perhaps it would help people like me understand the world of ‘prudent finance plans.'
The concept of ‘borrow and live' got a fillip about 20-25 years ago. Is so much of debt good for one's living? A look at the ‘interest and principle flow' is outrageous as after, say two years, it is a paltry Rs. 3-4 lakh that one would have settled for a Rs. 35 lakh 10-year loan.
As a finance expert Mr. Rao may help people to plan finances, but is such a move (getting into the EMI trap) prudent at all?
Why should people struggle to save up so much? Please tell me if this isn't a larger drain than a prudent investment. If one has to invest he should look for cheaper options and do it after a large part of the buy is from his own savings!
Why should one be encouraged to buy just because you have institutions lending you for a large interest?
Our panellist, Balaji Rao, replies: It is said that one cannot avoid two aspects in life – death & taxes; perhaps we can add “loans” to this list. “Debt traps” are not laid by financial institutions, but they are laid by people themselves. Today a father runs from one bank to another seeking an education loan for his 21-year-old child's post-graduation, but would have failed to plan a prudent investment strategy when the same child was 11 years old.
Prudence lies in people getting disciplined with their investment plans, start investing early in their lives, investing in such opportunities that are other than fixed income and sticking to their investment plans with clearly defined objectives.
Unless this does not happen people will continue to dig their own trap and fall into it. Albert Einstein said, “Doing the same things over and over again and expecting different results”.
Today the dynamics of the world has changed. 20 years ago there were no malls, no swanky coffee shops, no LED TVs, no designer lifestyles; perhaps life was easier to live without the lure of today's glitter. But currently, with pressure on leading a “defined” lifestyle, money has become an imperative commodity and loans have engulfed our lives.
Let us note that savings is a personal ability. If people can save a large portion of their income and afford to wait till they are in their 40s to move into their own homes, it is fine.
In the same example of Inder & Vasudha that I mentioned in my column, their monthly income is Rs.60,000 and after commitments they were able to save Rs.16,500.
If we analyse their ability to build a corpus of beyond Rs.7 lakh it could take them at least 10 years to accumulate Rs.23 lakh, investing Rs.10,000 per month in an opportunity that offers them 12 per cent compounded returns.
But by that time both will be in their 40s and also the cost of an apartment would also have gone up significantly. But how many of them would wait till they get older to own a house?
The probable solutions could be planning for small families, restricting “lifestyle”-based living and investing in such opportunities that can beat inflation. Through this one can surely build bigger corpuses to avoid heavy loans. But as a financial planner my idea is to take into consideration the reality of current lifestyles that people prefer to lead and assist them in healthy investment practices.
In a country filled with lower middle and middle class families, loans are unavoidable and unfortunately people prefer to invest in “safer” options to build their corpuses which puts stress on their monthly outflow which usually will be higher.
If an individual in his 25th year starts disciplined investing in an opportunity that offers three to four per cent higher returns than inflation, he/she can surely build a healthy corpus by the time he is in his early 30s and avoid heavy loans eventually. But that is another matter which shall be discussed in another forum.
I genuinely empathise with your concern because I myself had been a victim of debt traps in my life, but given my income restrictions I too could not have avoided taking a loan to live in my own house.
Keywords: home loans