If everybody was thrifty or a good saver, there would have been less need of personal loans. Taking loan for a real need, rather than a want, may in fact be a good thing. For example, if a person who does not already own a house takes a loan for building a house, he will be compelled to put aside in future a portion of his earnings every month to repay the loan. These monthly payments would be akin to monthly savings.

If the same person, however, did not take this loan, he may have spent the money now being used for repayment. Moreover, if he uses a loan to buy an appreciating asset, he maybe deemed to have neutralised a high component of inflation.

In this, the example of a plot of land may be given, which is appreciating. By taking a loan, you can also advance the date of owning an asset. If such assets cause accrual of some gains, these gains will also start accruing from an early date. For instance, purchase of a house for self-occupation by means of a loan will mean saving of house rent.

In spite of the possible gains from personal loans, the total quantum of such loans should be well within the repayment capacity. In any case, one must avoid the debt trap.

Although the repayment capacity or creditworthiness of the borrower is examined by the lender, the borrower, too, should examine his own ability to pay back the loan. Sometimes, people prescribe a specific limit, in terms of a specific percentage or proportion of total earnings that should not be exceeded by monthly installments for recovery of loans. While this may have some merit, a better approach would be estimate theproportion of earnings and the absolute amount of money, that can be set aside for the repayment of a loan. For doing this, absolutely unavoidable expenses may be identified and added together.

This will give a realistic estimate of the money that is likely to be available for repayment of loans. Percentages of income available for loan repayment may vary widely, depending upon the income levels and specific circumstances of individual borrowers.

An aspect of personal loans that is not often appreciated is that when a person uses a loan for buying something, he does not exhaust his own money. It stays invested and continues to earn return to build capital.

For calculating the cost of a loan, in addition to the interest rate, other applicable charges such as service fee, application fee and early repayment fees, etc., should also be taken into account. Some income tax benefits for borrowers, applicable in some specific cases, may lower the cost of money borrowed. For example, under Section 23 (3),maximum deduction of Rs 15,000 in an assessment year is permissible on account of interest payable on borrowed capital for acquisition, construction, repair, renewal or reconstruction of a house property.

Income under ``Income from House Property'' is calculated after allowing certain specified deductions from the annual value of the house property. When a loan is taken for higher studies, under Section 80 E, a deduction of a maximum of Rs 25,000 in an assessment year is admissible in respect of the payment made towards repayment of the loan. Such permissible deductions reduce the effective cost of capital.

Another factor that can reduce the cost of personal loans is the anticipated income/ saving/ appreciation from the asset built with the help of a loan-e.g. saving of rent on a self-occupied house/ rental income from house let out/ appreciation in the value of property/ money saved on transport/ commuting on purchase of a vehicle, if any/ money saved on salary of a domestic servant on purchase of, say,a washing machine or dishwasher. Such gains may bring down the effective cost of money borrowed.

Hard loans or high interest loans should be paid back early. But ``early payment fees'' should be taken into account. On the other hand, soft loans or low interest loans should be paid back in the maximum permissible time. This is because one's own money may be earning a higher rate of return and building capital.

In case of credit cards, the general effective rates of interest are quite high. If it is possible, money should be paid back early and paid in full.Debt has played an important role in building many industrial empires. In the personal lives of individuals, too, debt need not be an evil -- if understood properly and utilised judiciously.