A bank loan is a contract between you and a bank, where you get a loan now and promise to pay the bank in the future, plus interest. The number of installments and interest are combined when you sign the contract.
The amount you borrow (as opposed to financing) need not have a specific destination: you can spend whatever you want.
This is what makes the loan an interesting thing: You have the opportunity to take a big one at a time and slice it into several pieces. Instead of disbursing it all at once, you divide this expense into monthly installments.
This is quite obvious, true. But the important reflection about this is that you have to be very realistic and think, “Does the parcel fit in my pocket? fit my monthly budget? “
This is the first tip to avoid future problems. Paying your bank loan first is good, because you pay less interest.
Now, if you’re in a hurry to pay soon, the installments can get too big and squeeze your life too tight! You may not be able to pay your bills (which can be very damaging to your life when you take out a new loan in the future).
So, don’t think so much about the number of installments. Think of the amount of the portion that fits your budget.
The key is to get a bank loan only if you earn more than you pay.
And here is the jump of the cat! That is the fundamental thing about loans. This is what answers almost all of the question: is it worth taking a bank loan?
The answer is clear: It is only worth taking a loan if the benefit of taking it outweighs the interest you pay.
This means that you should only get a bank loan if you earn more than you pay.
Imagine that you took out a USD 5,000 loan to start a new business: it could be a pastry shop, it could be a room renovation in your home to host tourists. Release the imagination.
You are paying 10 installments of USD 600 per month.
That is, in total, you will pay USD 6,000 back to the bank (you borrow USD 5,000 and pay USD 1,000 in interest).
What’s up: Will your new business pay more than that?
With the money you will earn – for example – by hosting tourists, will you be able to pay this interest? And is the time you will spend working on it worth it?
If so, then getting a loan seems like a good idea.
What if interest increases to USD 2,000? And for USD 3,000? You would have to return much more money to the bank. So, is it still worth taking the loan or is it better not to touch it?
Now imagine the worst case scenario: what if the business doesn’t go as well as you think? Would it still be worth the risk of not being able to repay your debt?
Just before getting a loan to undertake, see if your business will be able to repay the loan and interest (after all, you don’t want to pay to have to work).
Also, stay tuned for microcredit opportunities! The rates are low and can reach less than 20% per year!
Before getting a loan to undertake, see if your business will be able to repay the loan and interest.
If you take a cheaper debt to pay a higher debt, it is very worth it!
And the cheap and expensive here has nothing to do with the value of debt. It has to do with the interest rate.
The classic case is renegotiation of overdraft. On average, interest on overdraft accounts for around 300%. In average! That is, there are banks that charge even more expensive for this service. Using credit card revolving credit (ie paying less than the full invoice amount) is also another villain budget: the average rate is over 450% (the average !!).
So if you don’t want to see your debt quadruple, it’s not enough to just pay off the overdraft. You have to take a stronger action to make your account stop bleeding. This attitude is debt renegotiation.
The first thing is to contact your bank manager or call your credit card company and ask them to cancel the product and install the outstanding balance. Be very aware of the interest rate that will charge you!
Similarly, what if you could get a loan that cost you 80% a year? In this case, taking out this loan and paying off other debt with higher rates is a great idea!
And for many people this is quite possible. There are cheap lending options such as payroll loans, pledge, auto refinancing and mortgage. If you want to know more, we recommend reading this other article which we talk about in more detail.
Unforeseen events happen (family health problems, for example) and may require a cash outlay that you do not have. Then there’s no way: if you don’t have insurance, a savings saved, or a borrow from a family member, the personal loan will be your emergency exit.