It’s enrollment time but you want to take your kids on a family vacation, even if you’re running low on cash. Or your family could be facing a medical emergency where you’ll need access to cash, and lots of it. When is it a good time to get a loan – for the first reason, or for the second reason?
Many of us have been in a similar position once in our lives, when we had to borrow money for urgent and unscheduled expenses. There is nothing wrong with borrowing money, for as long as you do so for the right reasons, and for as long as you pay for it without jeopardizing your long-term financial health.
Unfortunately, a good number of borrowers take out a loan for the wrong reasons. Worse, some of these borrowers are unable to pay for their debt on time, resulting in finance charges and interest rates. Those who borrow money from loved ones and are unable to pay end up with soured relationships.
This is why it’s important to be very circumspect about borrowing money. If you still are not sure if you have a good reason to take out that loan or not, here’s a guide to help you.
- For emergencies. When someone has to be hospitalized, or if it’s a life-and-death situation, then go ahead and borrow money, as no sum can equal human life. Most emergencies are medical in nature, or may involve death of loved ones. Find the lowest possible interest since your debt levels can rise quickly especially for medical expenses. Also find ways to bring down your medical-related expenses such as choosing a less expensive room or ward, among others.
- For tuition. Your goal in this case is to ensure that your child finishes the grade/year level or the subject course that he or she is in. Then, assess why you could not afford paying for the tuition expenses in the first place. Is it because you cannot afford the school your child is enrolled in? If so, then you may wish to consider moving to a more affordable school. And if you must borrow, make sure you pay it off in a year or less. Otherwise, you would be paying for this year’s tuition and last year’s tuition and you could still be borrowing for next year’s!
- To bring down interest expenses. If you’re saddled with debt arising from high interest rates, then there’s good reason to borrow money at a lower interest rate that would allow you to refinance your debt at more affordable terms. Credit card companies understand this, so they offer balance transfer payment facilities to let you save interest payments.
- To purchase a major asset. If you want to buy a house or even a car, it’s perfectly fine to take out a loan for as long as you have checked out your financial capacity to pay for this over the amortization period. Many banks offer housing and auto loans at competitive rates. Talk to your banker to ensure that the loan terms are best suited to your specific needs. Feel free to rate shop to get the best deal.
NOT SO GOOD REASONS, WE SUGGEST YOU REHTINK YOUR DECISION
- To satisfy a whimsical purchase. You want that sleek new smartphone but don’t have the funds for it. Should you borrow money? This is probably the worst reason to do so. If you can’t afford an item, then you shouldn’t borrow money to get it.
- To augment day-to-day needs. If you keep on borrowing money to make ends meet, then it means that you are not living within your means. If you keep on borrowing money, you will end up in a debt hole that you cannot get out of. If you are in this situation, find a long-lasting solution to your situation by cutting down your expenses drastically, or finding additional income sources.
- To gamble. It’s surprising how some people borrow money so they could use it for high-risk activities such as gambling, reasoning that it is better to lose borrowed money than money you have earned. This is flirting with disaster. In the end, you would end up owing money, and this will impair your financial standing in years to come.
- When you can’t afford to pay for your debt. When you are drowning in debt, don’t take in any more. This is going to cause you additional problems. Instead, sell assets, or talk to the people or institutions you owe so that you can work out a repayment deal under new terms. Cut your spending drastically until you are able to pay off your debt without incurring new ones.
Keep in mind that taking a loan is a serious responsibility. Not being able to pay for a loan can affect your personal credit standing and prevent you from getting loans in the future when you and your family really need it, so make sure you have assessed your financial situation before borrowing money. As the popular saying goes, “When in doubt, don’t.”
Grow Your Money is an editorial partnership between News.abs-cbn.com and Citi Philippines to promote financial education and provide helpful information to Filipinos on how to better manage their personal finances.
Visit www.citibank.com.ph for more information.