Borrowing is not a bad idea for abroad holidays

Going on a holiday to Europe or swiping your credit card to buying an LCD is not a bad idea

, provided you have saved for it. Taking a holiday loan or revolving payments on your credit card is an expensive proposition, as you can end up eroding your bank balance and potential savings.

So is borrowing a bad idea? The answer is No'. It depends on the end use of loans.

Loans can be categorised into secured and unsecured loans. Secured loans are issued by banks to borrowers against some asset such as house, car or investments. Home loans and car loans are the best examples of secured loans. If you are cash-strapped at some point of time, you can pledge your house or investments to borrow some money.

The disadvantage is that you will lose the asset if you are unable to pay back the money. But the interest rates are much lower and repayment periods are longer under secured loans.

An unsecured loan is a contractual obligation between you and a bank. The interest rates on these loans are higher (5-20%) since these loans are not backed by any assets or investment. The repayment periods are also shorter (up to three years).

Good Loans: Housing loans are good as you are paying EMIs to create an asset. Appreciation of property will earn you better returns in future.

Bad Loans: Car loans, personal loans

Car loans are bad because the value of the car depreciates faster than the principal amount.

Worst Loans: Credit cards, travel loans, loans from private money lenders. The interest rates are almost 40-45% and the end use is consumption, which can be funded with savings.

Borrowing is not a bad idea for abroad holidays

By: Bhavana Jhingan

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