Borrowing is, many a time, a convenient way for you to purchase something that you would otherwise take a long time to save up for. For example, home buyers rarely can settle the full cost of a home. Most borrow a large part of the purchase price, except for the down payment as security. Mortgage financing thus allows them to live in their home while they pay it off.
There are, however, major purchases were it is no wise for you to finance through a loan – for example a wedding or needing extra cash that allows you to bridge shortfalls between the income you receive and your monthly expenses or an expensive consumer good such as the latest smart phone.
Prior making a decision to borrow, make sure that you can afford the repayments of the new debt. In other words, that it will not place additional pressure on your monthly budget. Such pressure may result in you having to let go of important needy things – such as healthy food.
o Are you aware of the cost of borrowing money? When you borrow money, you have to repay the amount borrowed (the principal) plus interest. If you choose a floating-rate loan, be mindful that your repayments will rise and fall in line with market interest rates.
o Should you finance this expenditure, say a holiday or a car or the latest smart phone, by taking a personal loan or should you save for them? It is not like buying or building a house that requires a large amount of money. Obviously, saving will take longer but it will also mean that you will pay far less as you would not have any interest to pay.
o If you decide to finance a long weekend abroad or Christmas presents by means of a credit card ask yourself whether you will be able to meet the monthly repayments and interest, which is an additional cost. Defaulting on monthly payments, because you would not have worked out whether you can manage this new expense, will result in late repayment fees, a compounding increase on your repayment as the interest will also include the penalty. There is also the possibility that the bank cancels your credits and therefore cuts off an important source of additional fund. Therefore, think ahead and make wise decisions.
o everyday expenses.
If you have trouble paying for daily necessities, borrowing money could put you into debt. Credit cards can soon come into mind to help you cover the daily costs but remember that credit cards, when not used properly, or when not repaid on time increases your debt.
o optional spending.
If you can put off an optional purchase until you have saved. You will also avoid interest charges altogether.
o other debts.
It is unwise to borrow to settle other debts. If you are already deep in debt, going further into debt is probably not the best solution.
o consumer items that are beyond your reach.
You do not need to have the latest smartphone or an expensive, trendy brand. There are many models of smartphones that are affordable and will provide you with more functionalities that you will ever use.