Pros and Cons of Borrowing for Ongoing Expenses
Loans are not always taken out to finance a necessary purchase or to quickly gain additional liquidity due to unexpected bills etc. It is not uncommon for loans to be taken out to afford something supposedly “everyday” in order to fulfil wishes which, however, are not absolutely necessary when viewed objectively. How sensible or dangerous are such “everyday loans”?
To fulfil a wish or to enjoy consumption, even though one can basically not afford it with the regularly available funds. Who does this not seem familiar to? And so they have to come, the everyday loans, i.e. loans that you take out in order to be able to afford gifts and travel or to allow yourself other things that do not fit into your current budget. Most of these are overdraft facilities or financing, i.e. instalment purchases. Sometimes, however, personal loans or instalment loans for smaller sums are also taken out, so that they can usually be classified as mini loans or small loans. Like any loan, however, taking out an everyday loan should also be well considered. Because, as with any other loan, small loans also have disadvantages.
Holiday, Christmas and birthday on credit?
Everyday loans – especially in the form of overdraft facilities – are often more expensive than the conditions of instalment loans. For this reason alone, a family celebration on credit is not a convincing idea. The fact that overdraft facilities have no effect on creditworthiness or the Agency score can be seen as an advantage over other forms of credit. However, with an average double-digit interest rate, it is the most expensive form of an everyday loan.
All other loans that can be taken out for everyday expenses have an effect on the personal Agency score. Not necessarily completely negative – especially not if the loans are serviced reliably and regularly. However, anyone who makes frequent use of loans, perhaps taking out more and more new ones within a few years, risks their creditworthiness. Even if the sums of credit are small.
Having wishes is a matter of course. However, you risk living beyond your means and, in the event of an emergency, you risk losing all your creditworthiness. For example, if you book your dream holiday on credit and then find yourself in an unforeseen emergency situation – which can be anything from unexpected unemployment to a spontaneous bursting of a water pipe in your own home or a total loss of your car – you are in a bad position if you then have to rely on credit.
Knowing pitfalls, weighing up risks
A financed holiday or a loan for expensive accessories and gifts carries the same risks as any other form of borrowing. The ongoing period of low interest rates makes loans naturally tempting even for everyday expenses. In addition, more and more providers – especially on the Internet – are tempting people to take out loans even if they have a weaker credit rating, lower income and less collateral. This can be the beginning of a dangerous downward spiral for financially weaker people when they have problems repaying the loans they have been granted, usually under poorer conditions, at correspondingly worse terms. The risk of gambling away the creditworthiness that would be needed for really urgent bridging loans is high.
There are reasons why loans are not granted in every situation and at the same conditions for everyone. In the end, you will end up defaulting on money that the lender can easily get from debt collection companies. As a borrower, however, you are left with the fees and surcharges of these intermediaries on top of that. This does not reduce the mountain of debt, it only makes it even bigger. So it is better to save on the object of everyday desire – whether shoes, bag or holiday – if it exceeds current possibilities. It is also decidedly better to travel and relax if one is not plagued in the back of one’s mind by thoughts of rates, interest rates and Agency scores.