It’s like a sword hanging over your head, the biggest stumbling block to your investments. Benjamin Franklin famously quoted “Rather go to bed
supperless, than rise in debt”. I’m talking about loans which are offered these days at the drop of a hat by financial institutions. When a person ran into debt he was considered a true American, but I guess us Indians are also joining this bandwagon of the West.
In my career as a financial advisor, on more than a few occasions I have refused to accept client’s investments because they have been very callous towards their bloating loans and refuse to prioritise foreclosing their debts. Irrespective of the amount you invest, if your liabilities exceed your savings then you are inviting trouble because your net worth is negative. It is like putting the cart before the horse.
My biggest sigh of relief was when I proudly walked into the bank to collect my property documents since I had closed my loan and the house was now officially mine. It was a big burden off my chest. Foreclosure of loans not only releases this stress but also ensures the asset is yours… until then it belongs to the lender. Please remember, you don’t own the asset until you pay off all your debts.
Take a closer look at the principle and interest component of your EMI – you will be surprised that in the initial stage the interest constitutes more than 70% of your instalment. Hence, the interest is manifolds higher than the actual rate. This is exactly the reason how lenders juice out the maximum revenues from your loans during the initial few years of the tenure.
EMI’s, like worms, nibble into your savings considering the instalment you are obliged to pay every month. This simply delays your investment plan for long term wealth creation. Also, remember that loans add up to the overall cost of your asset purchase.
Prepayment / foreclosing of loans can be done either by reducing the tenure of the EMI and increasing your instalment amount or by paying lump-sum amounts intermittently towards prepayment.
Loan certainly helps you attain your goals in life but if you prolong it for a long period it can sabotage your wealth. So, if you want a good night sleep, if you want to create wealth and ensure your family is not enslaved with liabilities in dire circumstances, then prioritize closing your loans.
On a lighter note, our king of good times who seems to be absconding, has a clear message for all of us “If I owe you some money, I have a problem but if I owe you billions, then the problem is yours!”