The question
"Everyone says loans are bad. But my uncle bought his auto with a loan and now it earns him money every day. So which is it?"
---
Home reading
A loan is a tool, and the question is what you point it at
Borrowing is neither good nor bad. It is renting money — you take it now, you pay it back with a fee for the use of it.
Whether that is sensible depends almost entirely on one thing: what happens to the thing you bought.
Your uncle's auto earns while he repays it. The loan cost him something and the auto gave him more than that. He is ahead.
Now suppose he had borrowed the same amount for a phone. The phone earns nothing and is worth less every month. He pays the same interest and has less at the end than he started with.
Same loan. Same interest rate. Opposite outcome — and nothing about the loan decided it.
The one question
Before borrowing for anything, ask:
"Will this thing earn more than the loan costs, or save me more than the loan costs?"
- An auto that earns ₹800 a day → yes
- A sewing machine for a tailoring business → yes
- School fees that lead to better work → usually yes, over years
- A phone, a television, a holiday → no, and that does not make them wrong, only expensive
The last line matters. Borrowing for something that earns nothing is not forbidden. It is a decision to pay extra for having it sooner, and it should be made knowing the price.
Two loans that look similar and are not
| Auto for work | Phone for enjoyment | |
|---|---|---|
| Earns money | yes, daily | no |
| Value over time | earns while it ages | falls steadily |
| If income stops | the auto can be sold or driven | the phone is worth a fraction |
| Loan cost | paid out of what it earns | paid out of your salary |
The phone loan takes money from a household every month and gives nothing back to help pay it. That is the whole difference.
The trap is not the loan. It is the second loan.
Almost nobody gets into serious trouble on their first loan.
It goes like this. A loan is taken. Repayment is tight but manageable. Then something ordinary happens — a medical bill, a slow month — and one instalment is missed. A penalty is added. Now the next instalment is harder. So a second, smaller loan is taken to pay the first.
At that point the borrower is paying interest on interest, and you already know from chapter 2 what that does.
Borrowing to repay borrowing is the point where trouble starts. Not the first loan. That one is a signal to stop and get help, not to borrow again.
Rates, and what "3% per month" is hiding
Ordinary loans in India charge somewhere around 9–15% a year. Some app loans and credit cards charge 36% a year or more — and they usually advertise it as "only 3% per month", which sounds smaller and is the same number.
Apply the rule of 72 from chapter 2:
`` 72 ÷ 36 = 2 years for an unpaid amount to double ``
Compounding does not care which side of it you are standing on.
Always convert a monthly rate to a yearly one before agreeing to anything. Multiply by twelve. It takes two seconds and it is the single most useful defence in this chapter.
Before you agree to any loan, find three numbers
- The yearly interest rate — not the monthly one, not the "EMI starting from"
- The total you will repay — EMI × number of months. This is the number nobody quotes.
- What happens if you are late — the penalty, and whether it compounds
If someone will not give you all three in writing, that is your answer about them.
---
Worked example
Two people borrow ₹60,000 for two years at 14% a year. Both pay about ₹2,880 a month.
`` EMI ₹2,880 × 24 months = ₹69,120 repaid borrowed = ₹60,000 ───────── the loan costs ₹9,120 ``
Ravi buys a sewing machine. It brings him about ₹4,000 a month of tailoring work.
`` earns over 24 months 4,000 × 24 = ₹96,000 loan cost ₹9,120 ───────── ahead by ₹86,880 — and he still has the machine ``
Sunil buys a phone. It earns nothing.
`` paid ₹69,120 phone's worth after 2 years about ₹12,000 ───────── down by ₹57,120 ``
Same amount, same rate, same EMI. The difference is entirely in what the money was pointed at.
(Sunil is not foolish. He may have decided the phone was worth ₹9,120 to have two years earlier. That is a real choice. The mistake is only in not knowing the number.)
---
⚠️ The common mistake
"I can afford the EMI, so I can afford it."
The EMI is what you pay each month. It is not what the thing costs.
Sunil's phone did not cost ₹2,880. It cost ₹69,120 — and stretching the loan to three years would have made the EMI smaller and the total larger.
A longer loan always looks more affordable and always costs more. That is the trick inside every "low EMI" advertisement, and it is not a lie — it is a true sentence about the wrong number.
---
Check yourself
- Give one thing worth borrowing for and one thing not, and state the test you used.
- A lender advertises "just 2.5% per month". What is the yearly rate? Using the rule of 72,
how long until an unpaid amount doubles?
- A ₹40,000 loan is repaid at ₹1,900 a month for 24 months. What is the total repaid, and
what did the loan cost?
- Explain why a longer loan has a smaller EMI and a bigger total cost.
- Why is borrowing to repay an earlier loan the dangerous step, rather than the first loan
itself?