Should you liquidate an asset or take a loan?

While financial prudence demands that one should have as little debt as possible, preferably none at all.

But there are times when it may be a better idea to fund the purchase or expense through debt rather than liquidating an existing asset.

Loans can help you to realise your aspirations in a timely and planned manner, provided you repay the loan on time. Navin Chandani, chief business development officer, Bankbazaar says, “Not all debt is bad. Aspirational products like a car or home of one’s own can take years or even a lifetime to save up. By the time you save up, you may realise that your savings aren’t enough. Other things, like education or health-related expenses, are very time-bound. You may not be able to pursue a higher degree five years down the line, or it may be too late to pursue by the time you build up your corpus. In all such situations, a loan can help.’’

Manav Jeet, MD and CEO, Rubique, points out that someone who has never taken any loans, will not have any credit history. “In certain countries, people with no credit history are not viewed as viable borrowers. It is essential to have some sort of debt to have a credit history. However, this is more a self-management choice, meaning if one requires borrowing money they can always look at lenders for the same,’’ he says.

While debt is best avoided, but is there anything like a good debt, at least in certain circumstances?

Financial planners disagree. “There are only two classifications for debt - bad or worse. Nothing like a good debt – not even for housing. However, some professionals can borrow and buy assets which grow faster than the rate of interest. Normally these are professional investors - not for the common man. Borrowing to get tax benefits is one of the stupidest tax planning techniques,” says P V Subramanyam, chartered accountant and financial trainer.

Individuals should do a cost-benefit analysis before they decide to take a loan or liquidate an existing asset. “For instance, you are buying a car, and you have a fixed deposit (FD) that covers a substantial part of the cost. If your loan costs you 12% and your FD gives you 6.5% after tax, you may want to liquidate it and take a smaller loan. However, if the same amount is in an investment that gives you 15% returns, you would be better off with a loan. So, take your financial, practical, as well as emotional situation into consideration before you take a call,’’ says Chandani.

In case of emergencies and if you can repay the loan in a few months, then you may be better off taking a loan. “In case of shares or mutual funds, it is worth holding on during tough times and selling during good times,’’ advises Subramanyam.

“This is a very personal choice based on the individual’s urgency. Selling an existing asset may take some time, while a loan will have an interest rate. It is primarily the choice of the individual if they have the option to wait or not,’’ feels Jeet.

While you may choose to opt for a loan, but often individuals find that the bank rejects their loan application. “If your loan application is rejected by a bank, you always have the option of approaching an NBFC for a loan,’’ points out Chandani.

Banks and NBFCs have certain criteria they use to evaluate a loan application. “Compare your background and requirement before you apply for a loan with any lender. If your credit score is lower than a particular threshold, banks may not be willing to lend. NBFCs have more relaxed policies towards customers with low credit scores, though it comes with its own caveats. So, if you have a lower credit score, it would be better to apply to an NBFC,” says Chandani.

With the advent of fintech, there are now a plethora of unconventional alternative lending options also available to individuals.

Rubique is an online credit marketplace that uses technology to ensure perfect matchmaking between borrowers and lenders. “We leverage technology to not only reduce processing time but also bring predictability and assess creditworthiness, thus offering the best deals to customers,’’ says Jeet.

If you opt for a loan, remember that you first check that you can afford to repay the loan. Also, avoid private financiers as some of them resort to extra-constitutional methods to get back their loan. 

DEBT- TO DO OR NOT TO DO?

• Individuals should do a cost-benefit analysis before they decide to take a loan or liquidate an existing asset
   
• Loans can help you to realise your aspirations in a timely and planned manner, provided you repay the loan on time
   
• Banks and NBFCs have certain criteria they use to evaluate a loan application