Borrowing money should never be a simple decision, but it must be thought through carefully before. Borrowing money without doing the work before properly increasing the risk that you will end up with future financial problems.
Here in the third section of this series, we continue to address various good points for you to consider before applying for a loan. If you want to read the second part, you can do it here. There we address points such as SMS loans, how you can affect interest rates and effective interest rates.
Buying something on installment is the same as borrowing money for it, although you often use a few other words to describe it all. In the stores, therefore, there are often things that it is interest-free to buy from them. If it says something is interest-free, you should not automatically think that it is just driving as it can still incur costs.
An example of how it can stand in the store is as follows. Buy this TV for 2000 USD at “0%” interest rate. Then in the text itself it says that you have to pay USD 395 in setup fee and that there is an avi fee of USD 29 per month. The maturity is 12 months for this purchase.
The sum of this purchase then becomes for you that the TV that would cost USD 2,000 in the end actually costs USD 2,743. You pay USD 348 in avi-fee and the setup fee of USD 395, which makes the total amount almost USD 750 more than what the TV cost from the beginning. This actually corresponds to an effective interest rate of 37%.
Then it should be said that you think it is worth paying this extra fee and then it is obviously up to you to make such a decision. It just has to be aware that costs can be added.
Then it doesn’t have to be that an interest-free purchase has fees of this kind, but it can be free of charge for real. Media Markt, for example, has often had such offers where you buy on installment against 0% at effective interest rate. Always review the terms carefully before making a decision to buy “interest-free” so you know what applies.
One thing to be aware of is that it is important to manage your repayments. Should you not follow the plan that is laid out when you make the purchase, there may be additional costs. For example, it may very well be interest on the remaining part of the loan if you do not pay off the debt.
Maturity has a major impact on how much it costs to borrow a certain amount. Usually, you only talk about interest rates to think about whether a loan is expensive or not, but for you who lend money, the number of kronor it actually costs is the most important thing, not a percentage figure.
Let’s take a simple example of a loan of USD 300,000 that has an interest rate of 6%. If this loan is repaid in 5 years, the interest cost itself will be approximately USD 46,500. If it is repaid in 10 years instead, the cost of the interest will be about USD 97,000. So we are talking here about a difference of about USD 50,500. From this perspective, it is therefore quite obvious that it is best to repay a loan as quickly as possible.
But then, of course, the issue is not that simple at all, but a faster repayment rate means that the debt is to be settled more quickly so that the amount that must be paid each month becomes higher. In our example above, you need to pay about USD 5,800 a month for 5 years, while for 10 years it will be USD 3,300.
So the question you should ask yourself when you want to borrow money is how much you can manage to pay per month. If you feel that there is a fairly large amount of repayment, you will save money in a shorter maturity. Just remember, as usual, that it is not a matter of overestimating the economy, because if you do not manage the repayment rate, there is a great risk that the costs will increase instead.
What should I do if something unexpected happens?
If there is something we can all be sure of, it is that we do not know what will happen in the future. If you need to take out a larger loan, it is important to try to keep this in mind.
Examples of questions that you should consider are what happens if you get rid of the job, what happens if the policy rate rises sharply or if you receive large increased costs in life such as children or the like.
Of course, you can’t guarantee yourself for everything that can happen, but a plan is often good to have. For example, in a good economy, make sure to spend extra money to cope with a period of worse ones. Or that if you have any uncertainty about the private economy, for example, just buy a house that you are very likely to know will not lose value in the short term.
What things you need to think about are impossible to say to me, but it is up to you to think through your situation and how you would solve any boredom.
One important thing to remember is that in case you should have any problems with the economy and thus find it difficult to repay on a loan, the first thing you should do is to contact the person you have borrowed money from. Often you can then come up with a solution that suits both of you. For you to know that the lenders always want a solution to the problems because there is otherwise risk of them losing money.