Living with loans. When should our debt-load concern us?

04.11.2016 12:45|Conotoxia.com

An apartment, house, a new car, investing in your own economic activity – these are ventures people usually borrow money for. According to data from BIK, one in every three Poles has been paying loan installments and more than half of debtors have more than one loan. Should you be afraid of living with debts? The fear is certainly larger when you use more credit for consumption and less for investing.

Bartosz Grejner, analityk Cinkciarz.pl

Credits have become “the daily bread” for Poles. Most likely, everyone has, had or will take out a loan. Banks and financial institutions are constantly tempting people with ads for loans with minimum preference installments, which are suitable for everybody. Even the federal and local governments finance their expenses with loans.

This is happening because you can’t pay the total amount of money for a lot of things that you want or need immediately. The most obvious advantage of splitting large amount into lower settlements is that buying a new house or a car, or developing your own business is within reach.

Long-term installments

However, debt becomes problematic when you decide to take out large loans, which generates higher installments that you are not capable of paying regularly. Such situations can occur due to unexpected and urgent expenses, the loss of a job or simply put; the lack of a cool head.

Before you decide to borrow money, you should take into consideration that taking a loan is fast and easy, but paying it back is slow and sometimes difficult. You also need to be aware that sometimes taking a loan may not be profitable. For example, if you buy a TV set for money from a payday loan, this will not increase your wealth. This is because the value of your new purchase decreases rapidly and paying installments takes a long time. However, if you decide to take out a loan for the purpose of financing your own company or education, you will definitely increase the positive impact on your future assets.

Of course, not every consumption credit will lead you into a vicious circle of debt. All it takes is to keep in mind that such credits cannot be the majority of your financial obligations. Moreover, paying installments should not decrease your life standard.

Not every credit investment will pay off

This situation is similar when it comes to loans for companies. A loan is usually taken in order to open opportunities that would normally be closed. Moreover, these opportunities can be positive for your company’s future development - to be paid off after gaining new customers. However, this doesn’t change the fact that the debt can also be negative for the company. Apart from the obvious problems in the case when the debt is too large, the money can be spent for things than may appear irrelevant for the company (luxury cars) and decrease its general value. Another example is the financing of unprofitable ventures with debt that is not only negative for your future loan obligations, but may be negative for your company’s general value.

We usually hear of national debts in a negative context. Building a new, and consequently expensive headquarters for a government institution with loan money is an example of an improper investment. Of course, this is if it’s not absolutely necessary. On the other hand, using debt to invest in human capital (improving education, creating new workplaces), may appear positive for the country’s GDP.

Currency loans

In this case, the particular currency should be the most crucial element of your decision. It’s for the best to take a loan which is denominated in the currency which is consistent with your source of main income. This allows you to eliminate the currency risk, which is related to changes in the global currency exchange rates. The currency market is relatively volatile. Moreover, this is determined by many different factors, which are not always easy to predict. It’s enough to mention the example of Poles who had decided to take their mortgages out in the Swiss franc. Even though currency credits may seem tempting, they are burdened with a larger risk. It’s worth keeping in mind that even the most reputable financial institutions make mistakes regarding currency exchange rates forecasts. Therefore, it’s safer to assume that we won’t handle this matter any better.

Consumption is usually a decrease in value

Loans can be favorable and can contribute to development, as well as be used to increase assets. However, this has to be used for investment purposes and cannot decrease or disturb financial liquidity.

Consumption credits are controversial. This is because consumption usually causes the value of purchased products or services to decrease. On the other hand, future obligations are increasing, as well as becoming more difficult to pay.

Regardless of whether you look at the problems from the perspective of a single person or of an institution, your loan obligations can’t grow faster than your income. If you borrow this way, you will probably never pay off your debts.

 


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