Reduce that debt

Coming from a middle class background, I was always wary of debt. My parents were never in debt. They postponed acquiring luxury items, but never borrowed money to buy that refrigerator and the colour TV (both purchased from a matured insurance). Besides, those days, India had not yet seen the consumer boom. Credit was not easily available.

Then things changed. Banks now call and ask if you need loan at easy (easy?) installments. You could buy anything on credit card and pay only 10% of the outstanding (never mind the HUGE interest you pay). Instant gratification is the name of the game.

But, hold on. Is debt such a bad thing?> I could not have purchased a house or my dream car (not every one dreams of a Ferrari or a BMW; some of us dream of Scorpio too) with borrowing from banks. Besides, many companies have debt ("a healthy debt to equity ratio").

So why it is that I have against debt. And it is not just my background. I don't think so. To be get onto debt if and only if you have an investment that is paying you more than you are paying for the debt.

Let me take an example. For most Indians, buying a house is beyond our means. We need to borrow money from the bank. The house will be yours for Rs. 32,00,000. Let's assume you have the paying capacity to borrow Rs. 22,00,000 @ 9% interest. You could have paid Rs 12,00,000 from your pocket but since bank is ready to pay that much amount, you put in Rs. 10,00,000. My question to you is: what would you do with the Rs. 2,00,000 left with you. Are you keeping it for some contingency? Or are you going to invest it in an instrument which returns you more than 9%? If you are saving it for some unknown contingency, you have not been reading my blog. Get an insurance, man!
If the Rs. 2,00,000 is not yielding you (after tax) more than 9%, you are just wasting that money. You are better off, taking Rs. 20,00,000 from the bank.

Explore other avenues. Do your parents have some money to spare. Perhaps they can lend you some money. They might have a fixed deposit that is paying them at 6.5%. Take that money and pay them at the rate of 7% (they may refuse to take money from you; but you should insist). Does your company offer loans at low interest. Take that. Reduce that debt.

Put it this way: Given a choice I would like to buy that centrally located house or that spanking car from the fruits of my investment. Ideal. Failing that I would reduce my debt as much as possible