If you are short of funds, one of the common solutions is to borrow money from someone you know or raise a personal loan from a bank. Meanwhile, you could also take a loan to buy something of indulgence or luxury.
Will that be a rational thing to do? It has its own advantages and disadvantages. Here we list out some common reasons for taking a personal loan to buy a luxury item. These are followed by some cons of doing it.
Raising a loan for luxury: Is this a positive thing to do
I. No collateral required: When you take a personal loan to buy an item of luxury item, you do not need collateral. This means you do not risk loss of any asset if you skip a payment. So, it is a convenient way to procure an asset at a time when your financial situation does not support it.
II. Improves credit score: Taking an unsecured loan may help you improve your credit score, which would help you raise a loan in the future at convenient rates of interest.
III. Low-interest offers: There could be times when there is a loan offer at a lower rate of interest (say 10% per annum), thus incentivising you to buy an item of luxury without having to wait until you accumulate sufficient funds.
IV. Buy now and pay later: If spending money now brings you joy and pleasure, you can go ahead and stagger it over a long time in future.
Loan for luxury: Why should you avoid it?
I. High interest rate: Personal loans generally carry a high rate of interest. One should, therefore, opt for a personal loan only when one can afford to repay the loan without any hassle.
II. Luxury items depreciate rapidly: It must be understood that the luxury items depreciate quite fast. So, one should avoid taking loans for such items. There could, however, be a few exceptions.
III. Opportunity cost: The loan EMI that you are committing could, instead, go towards a mutual fund SIP and deliver a return of 12 to 15 per cent per annum. This means taking a loan to fund your lifestyle is a bad financial plan.
IV. Lifestyle inflation: Easy access to loans can start a bad habit. Today you decide to take a loan to buy a luxury watch, tomorrow it could be for a vacation, then it could be for a piece of diamond. And before you know it, a substantial part of your earnings could go into loan EMIs. This must be avoided at all costs.
Disclaimer: Mint has a tie-up with fintechs for providing credit; you will need to share your information if you apply. These tie-ups do not influence our editorial content. This article only intends to educate and spread awareness about credit needs like loans, credit cards and credit score. Mint does not promote or encourage taking credit, as it comes with a set of risks such as high interest rates, hidden charges, etc. We advise investors to discuss with certified experts before taking any credit.
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