What is the impact of taking loans or liabilities?
Liabilities or loans are taken to meet expenses or to create assets which cannot be funded by regular income.
Purpose of taking these
ThinkStock Photos Loans are generally repaid in monthly instalments so that the repayment can be done through regular income.
ThinkStock Photos A liability leads to a cash outflow from the future income for the repayment of the loan and the interest, thereby leaving lesser amount for future expenses and savings.
Liabilities created to meet regular expected expenses through personal loans or credit card loans point to inefficient financial management and lead to debt traps.
How they lead to debt traps
Liabilities taken to purchase an asset can be beneficial if the asset appreciates in value over time, as in the case of a home loan.
When a liability can be beneficial
(This content is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta).
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