Three loans you must avoid

With easy access to credit in the digital-savvy world, you can now get loans at a click of a button on your smartphone.

However, taking loans is not always a smart idea. In the financial world, loans are classified into good credit and bad credit. If you are taking a loan to build an asset such as a house or for your education, it is considered as a good loan. However, loans taken to fulfil your lifestyle needs such as paying your food bills or for buying gadgets are considered as bad loans. Here are three loans you must avoid:

Loans to buy food and clothes

Financial institutions now provide loans to pay for your food bills and even to buy clothes. For instance, if you order food through an online app you have an option to differ the payment and pay the total amount at a certain date of the month.

These are small ticket loans which would look small in absolute terms. You get a grace period of around 15 days. If you cross the due date, you will be either charged a flat fee of ₹250 as a penalty or 3% a month for the days the amount stays overdue on a pro rata basis.

Loans to buy household goods

If you don’t have money to buy furniture or white goods, it would be better to hold the purchases. nstead of buying your air conditioner, microwave and sofa on loan, you should instead save the amount every month to build the corpus required to buy it. Most financial institutions provide an equated monthly instalment option.

Some may offer an interest-free loan, however, you still end up spending more money in the form or a flat fee as processing charge or one-time fee. Financial institutions that offer consumer durable loans may also charge an interest in the range of 12-24% per annum.

Loans to pay off loans

Companies lending loans say that most individuals take loans to pay off loans that they already have taken. It is not advisable to take too many loans as you are likely to get into a debt trap.

However, in situations where you have to pay off a loan with a higher interest rate, you may want to opt for a cheaper loan.

For instance, say you have a credit card loan on which you pay an interest rate of 48% per annum. You can consider a personal loan of 12-18% per annum to pay of the credit card loan and minimise your outgo. However, remember that non-repayment of debt can have a negative impact on your credit report and credit score.