Optimise Loan To Increase Wealth

Binaya Ghimire

One can get a personal loan to manage his/her personal finance. A personal loan comes as a lifesaver when s/he desperately needs money but does not have any money to spare. People get personal loan to make their life easy. For example, they get a personal loan to buy electronic items (a laptop, an iPhone, etc.), kitchen gadgets (fridge, cooker, etc.), furniture (sofa, wardrobe, etc.), cars, bikes, etc. There is nothing wrong with this because they need a lot of money to buy these items. When they do not have enough savings, a personal loan becomes useful. Furthermore, one can start using these items at once and get time to pay back.

Personal loans became easily accessible in Nepal after the advent of Grameen (rural) Banking System, a microcredit and microfinance strategy developed by Bangladeshi economist Muhammad Yunus. Grameen Banking is often touted as a bank of poor because big banks are usually not accessible to the lower strata of the population. Adoption of the rural banking system also popularised cooperatives in Nepal. Since both rural banking system and cooperatives are founded on principles of trust and solidarity, it has become easier for lower class people to save money and get loan even when they did not have collateral. This popularised Savings and Credit Cooperatives in the country, and getting a personal loan became very easy. 

Money management 

With rural banking, people could easily get a loan when they wanted. However, the stakeholders of rural banking did not teach people how to manage their money. These days one can find almost all families in the rural areas having some kind of loans. Instead of using loan to buy assets and investing in something, people started buying liabilities. When they could not pay off their debt, they applied for new loan, then they eventually landed in a debt trap. Getting a personal loan can put the people into debt if they do not use it wisely. 

People were not taught to get a loan as much as they require. They applied for the full amount that they were eligible for. They knew they had to regularly pay the loan instalment but they did not have resources for repayment, they ended up getting more loans. You can get a personal loan for various purposes but you should never try to use your loan money to buy things other than assets. Asset means something that will grow its value over time. Assets mean something that can give you profits. 

People get a personal loan and use it to buy real estate properties, which are assets. Their value will increase over time. You can buy gold, which is also an asset because gold will gain price over time. One gets a personal loan to buy a car, which is not an asset as its value will depreciate over time. Furthermore, the owner will have to spend money to maintain the car. However, if you get a car and use it for commercial purposes, it will be an asset because it will give the owner an income. 

One can use a personal loan for education because education is also an asset that will give him/her dividends in the future. Personal finance was never taught to the people. The purpose of a personal loan is to help the loanee manage his/her personal expenses. If a person wants to rebuild garage but s/he does not have money, s/he gets a personal loan to rebuild the garage. You have not been able to get a surgery due to the lack of money. And you get a loan and use the money to get an operation. If you don’t have money for furniture, a personal loan can come in handy. There are so many ways to use a personal loan. 

Avoid liabilities 

However, this is not always associated with buying liabilities. The best use of loan money is to use it to purchase assets or invest. When one has decided to get personal loan, s/he will have to remember one thing - never use it to buy liabilities. Let’s say you got a personal loan and bought a car. Sadly, you lost your job. What would you do in a situation like this? 

Therefore, a better approach is never to buy a car with a loan and continue using a public vehicle. Why do you have to remould your kitchen with a loan? Why not save money until it will be enough for kitchen remoulding? It is okay to buy essential items through a personal loan. But how good is it to buy luxuries? You can get a personal loan to do anything you want if that makes you happy and if you are financially fit to pay back. How do you determine your financial fitness? Your loan repayment should never exceed 40 per cent of your net income. In other words, if your income is Rs, 1,000, your loan repayment should be less than Rs. 400.

(Ghimire is a freelancer.)