Eight out of 10 Americans have some form of consumer debt. And according to a study, an average American has consumer debt close to $ 92,000. If seen collectively, there is a debt of $ 14 trillion.
A consumer loan is a loan taken by a consumer. With this loan, those items are bought which can be consumed. But this fund is meant for consumption and not for investment. It does not have much advantage in macroeconomics.
Business Loan
If we talk about business loan then. Small businesses have taken over $ 800 billion in loans in the US. It sounds quite strange to hear. One can become rich even by debt, but this is the truth.
Today all the billionaires in USA have taken loans. And along with this, all the Billionaires of the world have loans. He has raised such a big empire only on the basis of loan. Business cannot be scaled up without taking loans.
Almost all business people take loans. Debt can make you rich, and debt can make you poor too. It all depends on how you use the loan. It all depends on many factors. If you use debt with a strategy. So loans go a long way in achieving your short and long term financial goals.
Good Debt vs Bad Debt
Here it is also very important for us to understand the difference between good debt and bad debt. First of all we should look at the interest rate of the loan.
That for the time for which we have to get this loan, will we be able to repay this loan back. And for what purpose we are borrowing money. A good loan is one that creates maximum wealth for you in the long term.
Whereas bad debt is that which destroys us financially. While taking a loan, we should focus on two important things, those things are risk and cost.
David Mook, Senior Vice President and Chief Private Banking Officer at US Bank Private Wealth Management. He says that “I take too much risk without the ability to pay off bad debts” from that perspective I see.
And bad debt is either too risky or too costly. If we talk about the example of bad debt, then the biggest example of this is credit card. In credit cards, you get loans at very high interest rates.
Along with this, Home Loans also come under bad loans. Car loans are another example of this. Because car is a depreciate asset. And the expenses we do or take loans for to increase our living standard all come in bad loans only.
Student loans also come under the category of good loans. If a student takes a loan to complete his college studies. And he earns well in his career. So that loan of his will be considered as good loan.
At the same time, he also avoids bad outcome. Along with this, if you take a house loan, then you should try. So that you can deposit as much money as possible. And take loan only on 40 or 50 percent amount.
You also make sure that you can make monthly payment also with consistency. If you do this then it will improve your credit score. Along with this, if a person uses the loan in stocks, mutual funds, bonds, leverage investing etc.
So it will also be considered in good loan only. It will not be his loan, he is investing in that loan. Which if we see from the point of view of macroeconomics, then it also benefits the economy. Along with this, diversifying the investment portfolio by taking loans is also a very good idea.
Advantages of Business Loan
Businesses have a requirement of funds, so that they can manage business activities properly. At the same time, it also maintains Cash Flow. Capital is needed for new machinery, staff salary, to scale up business, new inventory etc.
Working capital can be easily managed with the help of business loan. Along with this, it also plays an important role in the expansion of the business. If there is any change in the economic climate.
Business loan helps a lot in dealing with things like inflation, rise, up or down of crude oil price etc. It ensures financial stability. A businessman or a woman can get many types of business loans.
Both short term and long term business loans are available. Business loans are available at very affordable interest rates. Banks try to provide bank loans to big businessmen at competitive interest rates.
Banks also benefit a lot from this. Along with this, there are many convenient options for repayment as well. So that businessmen or businesswomen can repay the business loan with great ease.
For the growth or expansion of your business, you have to depend on the profit coming from the business. Due to which many businesses suffer losses.
With the help of business loan, you can take immediate action on your business strategy. You don’t need to wait. Along with this, by taking a business loan, you do not have to give the equity of your business to anyone.
Whereas if an investor will invest in your company, then you will have to give some percentage of your company’s profits to him. And it has to be paid for as long as the business operates.
But as the company grows in business loan, you get all its profit. Along with this, you have complete control over the business. You do not depend on anyone. You are free in decision making.
Business loan is a boon for small businesses. Because the thing that matters the most in small businesses is cash flow. If a small business is growing rapidly, then it needs regular cash. So that he can give to the employees.
Along with this, he also needs cash for machinery, equipment, raw materials etc. When business loan makes this process even more smooth.
Because when small businesses grow rapidly, they are not able to take that much money from the people around them, family, relatives etc. So business loan is the best option for them. This also improves their credit score.
If an investor funds you, he has complete control over you. He can also impose restrictions on that money. He can also give you instructions to use this money here and don’t do it here. Whereas this is not the case in business loans.
In business loan, according to your wish, you can spend that money in business equipment or business building etc., anywhere according to your wish.
Along with this, if we talk about its cost, then the interest rate of business loan remains very low. If your credit profile is strong then you also get huge discounts in it. And you also get good offers. The loan is easily available to you at very low interest rate.
Disadvantages of Business Loan
But along with this it also has some disadvantages. Which is very important for us to know about them before taking a business loan.
First of all, the financial institute, whether it is a bank, will see the capability of your company, whether you can repay the loan or not. Along with this, there is a lot of paper work as well. You have to fill the application.
Along with this, tax returns, financial statements, business plans etc. will have to be attached for up to 3 years. The process of getting a business loan is very long.
Specially Small Business Administration Loans, these take several months for you to get approved. If you have an immediate need of cash then this is not the best option for you.
Along with this, one of its biggest disadvantages is that it does not have the flexibility in repayment. You have to make a Pre-determined payment on a monthly basis.
If you have a small business and its revenue is less for a month, then you still have to pay the same amount. If you default and you are not able to make monthly payment on time, then a very big problem arises for you.
Whatever you held Assets, as collateral. They all go out of your hands. If you have kept your house as collateral, then your own house will also go out of your hands. Along with this, the interest rates depend on your credit score.
If you have a good credit score, the bank will give you a loan at very low interest rates. And it is not easy for small small businesses, to qualify for that.