It is a worrying time for so many of us. We are living through a unique period, and many of us have numerous financial problems due to the pandemic. But is it just making things worse in the current climate to take on more credit? We take a look at taking on extra debt and its possible consequences.
Good Debt v Bad Debt
We need to move away from the idea that all debt is intrinsically bad. It is not. Borrowing is part of life, and part of what makes an economy tick over. But of course debt can be very bad too. It can trap people and ruin lives. So we have to distinguish between different types of debt. When deciding whether to take on extra debt, you must analyse why you need to borrow and the consequences of doing so.
Taking On Extra Debt – Do You Need The Money?
The obvious starting point. What is the loan for? Do you need the money? Is it an essential purchase, and are there no other options available to you? Only take on extra debt if you feel it is a necessary move to do so. If you feel that once you borrow money and make full repayments you are in a better position than before.
Have You Planned Ahead?
Some people who borrow money do so either without thinking if they can really afford it, because they feel they have no other option, but that often isn’t the case. It might be that you could put off making the purchase or not make it at all.
Try asking yourself the following questions:
- Could I wait until I can afford to buy whatever the money is for without taking on more borrowing?
- If there’s something I require, is there another way of obtaining it. For example, swapping it for something else, buying it 2nd hand or getting it free from a n online site?
Taking On Extra Debt – Other Options
n the off chance that you truly don’t have to go through the cash today, you ought to genuinely consider setting aside some cash every month instead of straying into the red. On the off chance that you can hang tight and set something aside for a buy, rather than utilizing credit, it will cost you undeniably less, except if you meet all requirements for a 0% charge card bargain, as you will not need to pay any revenue.
It may likewise have been decreased in a deal or if it’s innovation, moved up to a superior model. For instance, on the off chance that you needed to purchase something that cost £500.
Savings And Other Credit Options
On the off chance that you don’t have any reserve funds, however can save, for instance, £50 per month, it would take you a year to save the £600 and you would have procured interest on top of this.
Trading in for money investment funds
In the event that you utilized the cash from your investment account; accepting your reserve funds acquired 1.5% per year, you would lose a limit of £9 in revenue in the event that it took you a year to save the £600 once more. That implies burning through £600 from your reserve funds would ‘cost’ you a limit of £609 when you’ve included the lost interest.
Utilizing a Card
In the event that you paid the £600 with Visa, charging a normal loan fee of 17%, and in the event that you repaid the obligation at a pace of £50 every month, it would take you 14 months to reimburse the obligation and would cost you £58 in revenue. That implies you’d be £49 (£58-£9) more awful off by paying on your Visa, instead of trading in for money your reserve funds.
