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Good Loan Vs Bad Loan: Which loans are beneficial and which are harmful? Know the difference between good and bad loans


Loans are also divided into two categories Good and Bad. Most people are not aware of this. Know here what is a good loan and what is a bad loan.

Nowadays many people take loans to fulfill small and big needs. Loan plays a big role in housing, car, and education to meet emergency needs. Due to this, many big tasks of people are done easily. Whatever the loan is, you have to repay it along with the interest. But do you know that these loans are also divided into two categories Good and Bad? Most people are not aware of this. Let us tell you-

Know what is a good loan

A good loan is a loan that increases your net worth after taking it. The rate of return in this is higher than the interest of your loan. There is a positive increase in your career and property and with time it can generate assets. Home loans, education loans, and business loans are kept in the category of good loans.

What is a bad loan?

A bad loan is considered to be a loan in which money has to be repaid in addition to the loan and the interest charged on it, in case of non-payment of the loan, it becomes difficult to get a loan in the future, both the lender and the borrower have to bear losses. Generally, the interest rates of bad loans are very high. Auto loans, personal loans, loans on credit cards, and consumable loans are considered bad loans.

Keep these things in mind before taking a loan

  • How important is it to take a loan and how much loan can you take? Consider this first because after taking a loan, it has to be repaid along with the interest.
  • If it is very important to take a loan, then keep in mind the debt-to-income ratio while taking it. Do not let the debt-to-income ratio go above 40%. Banks prefer those with a low debt-to-income ratio. The debt to income ratio should be below 30%.
  • If your credit score is good, you get a loan easily. In such a situation, you have a chance of getting a loan at better interest rates.
  • A credit score is between 300 to 900. A score less than 600 is considered very low, a credit score between 600-649 is considered low, a credit score between 650-699 is considered fair, a credit score between 700-749 is considered good and a credit score of 750-900 is considered very good.
  • Do not take loans too frequently and more than required. Limit EMI to 35% of income. Avoid taking unsecured loans repeatedly.
  • If you have taken multiple loans at the same time, then get rid of the loan which has higher interest first. Personal loans and credit card loans are available at higher interest. If needed, pay off the credit card first.

Smart tips for taking a loan

  • It is better to pre-pay the loan at the beginning of the loan period.
  • Understand the effective rate of the loan after tax concessions on it.
  • Increase the EMI of long-term loans like home and education loans.
  • Avoid taking loans for every small need.
  • Raise money by investing in small planning.