Now that I have shown the problems occurring due to Personal loans, you can ask a question ‘what if any emergency comes?’, ’what if any short-term opportunity comes?’. Likewise, there could be many ‘what if…’ questions you can ask.

The only answer to these ‘what-if’ questions is FINANCIAL DISCIPLINE. Below are some substitutes for Personal Loans. Read it carefully to be debt free initially than being debt free later.

Some substitutes for PL are as follows – 

1)     Delay in opting for PL. If you need PL to renovate your home, buy a pre-owned car, furniture, gold ornaments, gift someone expensive articles, motorbike, pay fees, pay for tourism, repay some or entire home loan, etc. I would suggest delaying the decision until you have sufficient money in hand to cover the expenses. That is because it will be foolishness to fulfil these desires/dreams with PL only apart from Paying fees. If you do not have money, do not go for it. It is as simple. It is further explained, in point number five; keep reading. For Fee, please see the next point.

2)     Paying Fees – Paying a fee is not a sudden expenditure that you have come across. So, you should plan this investment very well in advance. Paying the fees is not considered as expenditure if the child is going to complete it. If you were not sure your child gets admission to higher education, that will be merely an excuse because you never know the possibilities and capabilities of your child. So, without any excuses; start planning for it well in advance, especially when your child reaches grade 6 or 7.

3)     Medical emergencies – That is the only reason I believe one should, if necessary, take a personal loan. But, having a Mediclaim policy is always better. We will talk about Mediclaim policy in detailed, in later episodes. You may try to approach relatives or as a last option to friends to lend some money. Make sure you repay the money as soon as possible; otherwise, the relations between you and relatives/friends will become bitter. Such relationships only get bitter, day by day, if you don’t repay the entire amount soon. At least borrowing money from relatives is a lot more inexpensive than PL.

4)     Investments in the stock market, Mutual funds, fixed income, etc. – There is no other fool on this earth, taking a Personal loan to make investments in the stock market, mutual funds, or other fixed-income (FI) securities or FI mutual funds. There are legal as well as common sense related aspects why these people are called fools. The financial institutions keeps the condition that the borrower should not invest borrowed money in such securities. These are legal reasons; the logical reasons are, what if the stock market investment dips more than expected. The borrower will end up with two losses, principal and interest on loans, without enjoying the benefits of money received from PL. That is the big problem. Apart from this, another logic is – when you invest borrowed money, you get interest/returns on investment but on the other hand you are paying the interest too. The difference between the earned returns and paid interest is called SPREAD. Such spread is always lower. Means, the returns you earned minus the interest you pay equals to very low interest rate in your hand. This spread is either low or zero or even negative. Negative spread means, you are earning less than you are paying. So classic example will be – if you borrow money Rs 100,000 and invest in mutual fund for a year and you earn 12% returns and the interest you are paying is almost 7% (11.5% on reducing balance). The spread is just 5%. So, just to earn 5% spread, you are taking excessive risk. What if instead of 12% you lose your money by 4%. Your spread now will be negative i.e. -3%. In short you are losing your principal too.

Instead of borrowing money and then investing it; one can use the same EMI amount, without loan, to start investing in mutual funds, fixed income securities, government schemes etc. which will provide risk free returns (except Mutual Funds). Mutual funds are subject to market risks, please read the offer documents carefully before investing and please take advise of the investment consultants, tax consultants, C.A.s or financial advisor. Kindly also read our privacy policy with regards to investing. We do not recommend any type of investments. The illustrations, examples are provided for explanation purpose only and are completely hypothetical. Do not base your investing decisions on these hypothetical examples.

So, never try to invest using borrowed money. We recommend to repay the debt if you have borrowed excessive amount. This will reduce debt burden, increase credit score in CIBIL, save some money for you and most importantly it increases further borrowing power where financial institutions can lend you more money (for buying home etc.) based on your repayment history and credit score from CIBIL.

5)     Set goal – Suppose you want to purchase anything from point number one above. Make a systematic plan. Consider the cost of the goods you want to buy, suppose this is Rs.150,000. Then decide how much money can you set aside every month. If you cannot save the amount, then you are lying to yourself because if for buying the same article you were going to take a personal loan, how were you going to pay EMI when you have the same EMI you cannot save in advance. Think again.

Now, decide the amount that you can save. This amount could be equal to PL EMI, simple? Now invest that in a Mutual fund or recurring deposit schemes of banks, gold schemes of reputed jewellery shops, etc. At the end of tenure, you will get back the principal and the interest or returns thereon. This amount will be more than PL you are taking. Now you can fulfil your dream and even save some money without having the burden of loans and interest. Think one more time. These are the reasons I said ‘delay your decision’ in point number one.

6)     Do not have a goal? Like in point#1? Follow this – If you do not have any such goals like in Point # 1, nothing better than this. Keep investing, without wasting or expending so that you can achieve two goals. That will make you rich soon. I will explain this in my forthcoming episodes. So, for now, remember this point that you can be rich. It will build an emergency fund for you. It will also provide monetary support for any assets you want to buy in the future. This money will reduce the burden of loans in the future as well, because you have already saved money every month and earned returns on it.

7)     Good EMI (Equated Monthly  is better than bad EMI – What is good EMI? How an EMI could be good? But it is true. Good EMI is better than bad EMI. Bad EMI is the EMI you pay for  the loans you take. Good EMI is an EMI towards your investments. For example, a