Not all are lucky to remain debt-free. But you can make debt work to your benefit if you can strike a balance between needs and wants

NEITHER a borrower nor a lender be". That was the advice from Polonius to Laertes in Shakespeare's Hamlet. Conventional wisdom has always frowned upon making purchases that are unaffordable, as it amounts to living beyond one's means. By extension, borrowing, particularly to spend, has been berated too. To a great extent, those preaching thrift were vindicated when the financial crisis engulfed the globe - consumerism fuelled by easy availability of credit and disregard for savings were identified as the chief culprits.

Yet, it is difficult to resist the temptation of offers promising loans with 'zero' interest to help you purchase a washing machine or an LCD television, or to fund a holiday to an exotic destination abroad. Borrowings they may be, but they also help the loanseekers fulfil a need that would not have otherwise been possible. The key to strike a balance, therefore, is to separate needs from wants, and sign up for only those loans that either create an asset or finance a must-have.

Buying appliances and gadgets

Consumer durables, though, would fall somewhere in between. A refrigerator, for instance, is a necessity, rather than a fanciful desire, in cities. Therefore, affordability cannot be the only deciding factor here. It would also depend on the intensity of the need, the cost of the loan and your ability to service the same. "For instance, if such a scheme is being offered in association with the company's financing arm, the deal promising zero interest loans might make sense. At the same time, if the dealer is offering a discount against full cash payment, you would need to take a call," says Aditya Apte, partner with The Tipping Point, a financial planning firm. It also depends on how expensive the scheme is - if the interest rate is, say, 12% per annum, you could consider it, but the deal could be termed unviable if it is over 18%. Also, you need to bear in mind that contrary to what their name suggests, you may have to pay a processing fee or other charges that could inflate the outgo.

This apart, you need to consider your earning capacity as well. An individual with an annual income of Rs 10 lakh should avoid taking a loan for, say a washing machine costing Rs 15,000, as s/he can easily afford the same by saving enough. However, those earning Rs 2 lakh per year with a genuine need for the appliance could opt for a loan entailing an EMI of Rs 2,000, for the sheer convenience it offers.

Purchasing a house

When it comes to housing loan, there is no doubt about the category it falls under. Given the property prices in the metros, buying a house outright is next to impossible, unless you already own a property that can be sold for the purpose. Thus, there is no substitute for a home loan. Besides, these loans are available at a lower rate of interest and also for longer tenures, thus putting relatively less strain on your finances. Also, the tax benefits home loans offer - Rs 1 lakh on principal repayment under section 80C and Rs 1.5 lakh on interest paid under section 24 - make them attractive.

Desire for a car

Car is another asset that carries high aspirational value in India, next only to a house property. Moreover, it offers immense convenience too. Taking a car loan, therefore, need not be seen as a sign of fiscal imprudence, even if it is depreciable asset. "A car loan would make sense if you get a good deal as it results in the creation of an asset whose utility value is high," says financial planner Amar Pandit.

A loaned vacation

When it comes to travel loans, it is advisable to abide by conventional wisdom to the T. If you can't afford the holiday you have planned, change your plans. Set your sights on the one you that can be funded out of your savings. Spending on exotic holidays would qualify as a discretionary expense - a luxury, not a need. Since these are unsecured loans, the rate of interest is high, which means that your borrowed time-off could give you more grief than joy.

Personal loans and credit cards

Banks don't think twice about dangling such loans if they find your profile to be suitable, but it is advisable to stay away from them if the purpose is spending. These debts come with exorbitant interest rates and demand extreme caution while availing of the same. Ideally, these should be tapped only in the event of emergencies. In short, viewing borrowing as a precursor to a disastrous financial situation may not be the right approach to adopt. Instead, evaluating each debt on its merit could provide the right balance between fulfilling your needs and living within your means.

BORROW IF YOU MUST

Separate needs from wants while deciding to borrow Analyse the cost of waiting for the purchase v/s the cost of borrowing Borrowing to buy a home always makes sense because of fiscal incentives Always look at the real cost of borrowing - processing charges plus interest rate less rate of inflation These days, prices of consumer goods decline because of technology Merchants often give discounts for upfront payment for goods that are otherwise available in instalments Using your credit card for financing is probably the worst Take a loan, preferably, only to create an asset There is no substitute for home loan, given the spiralling real estate prices in metros A car loan could be justified as it offers high aspirational value Change your holiday plans if you need a loan to fund it Personal loan is an expensive debt, hence best avoided.