When a person/company bank/financial institution or firm lends some money to another person to be returned with an additional amount in terms of interest against some security then that is called loan.
When a person buys a product by taking a loan it normally means that one is paying more for that product which he/she wants but at a higher rate. The need for the product makes a person take a loan in spite of the fact that he /she does not have sufficient money for the time being to buy that product or service. However he may decide to get the product irrespective due to his want and may be as he is getting it at a better discount for now. But least does he realize that he in fact is paying more in the bargain. Let us see how.
Let us assume a product says a car costs Rs.400000/-.However the purchaser does not have that amount in hand at the moment. So he goes in for a loan say from a bank let’s assume HDFC bank. Now the rate of Interest for acquiring the car loan is 13 percent as on today. The person seeking the loan will say take this loan for 5 years? This in effect means that the person has to pay an interest of Rs.400000*13/100 per year (considering that it’s a fixed rate) ie Rs.52000/- as interest itself. Now if this loan is paid fully in 5 years on the face of it the person taking the loan actually pays Rs.52000*5=Rs.260000/- as interest itself. Making the cost of the car Rs.660000/-
However this is just an rough example of how the cost increases when a loan is taken .However in the case of a loan for housing though the cost increases the value of the property also will appreciate during that 5 years and also one gets tax benefits in section 80 c and section 10 for the principal amount repayment and the interest factor respectively.
Normally banks or financial institution will not give 100% loans. They will give only say about 80% of the value of the property as a loan. Here just as an example if the value of a house is 40,00,000/- we will get just about 32,00,000/ as loan which can be repaid over a period of 7 to 14 years.
Generally as a conclusion it can be said that taking a loan for an appreciating asset is more beneficial.
A leading Independent personal financial website is Malaysia Loan street.