Loans are Double-Edged Swords


Loans are double-edged swords.

Firstly they work on the assumption of the continuity and certainty of one's future income. Banks only lend you money when they are sure that you can work and pay them off. What if one becomes disabled or retrenched, and loses the future income stream?

Secondly they work on leverage. Pay a downpayment (say 20%), borrow the rest (80%). There will be no problem if one has assets equalling or exceeding the 80%. But most people are asset rich and cash poor. If they were to just lose a couple of months of income, their world would come crashing down.

With the recent euphoria over property and car purchases (mostly on future income and leverage), there are bound to be many people being burnt by the inability to repay their loans when interest rates rise, or the value of their property falls.

Looking at the unhappiness over MAS implementing a 50-60% cap on car loans, it is evident that many people do not have enough assets to make up for the downpayment.

It is a good thing to do if you have enough assets to pay off the downpayment, and using the loan for leverage and to take advantage of the current low interest rates. It is, however, risky to empty your savings into the downpayment and have nearly zero assets to fall back on when times are rough.

Be prudent when taking on loans. Don't borrow more than what you can comfortably repay and always leave surplus savings for emergencies. Avoid over-leveraging and insure your outstanding loan amount and your future income.

CJH

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