The Danger of Loans

The danger of loans part 1

Loans can be a very dangerous thing if not properly managed and understood. An ill managed loan can cause much distress and to certain extent cause the loss of homes and even break up family and marriages. Yes, it is that serious and I know from my personal experience. To the average person a loan is simply an amount of money borrowed from somebody. But do you know that loans can come in many different forms such as “fixed payment loans”, “flexible payment loans”, “car loans” and even credit card debt can be consider a form of loan just to name a few.

I myself to date owe about $62319 to three separate loan facilities. I have to admit that if this is not resolved it could very possibly ruin my marriage. I weighs on my mind every single day and to be honest I’ve been trying very hard to increase my income by means of the internet and is really hoping that HELIUM might somehow be able to help generated some revenue for me. Yes I am that desperate. To be fair, my wife does know about the loans. Two of the loans were in fact a joint decision, it is the third one that she does not know about. I regret my moment of folly and I am paying the price for my rash decision. I pray every night that I need not pay a higher price because if my family were to know about the third loan, I am pretty much done for. My friends, the purpose of this article is to share with you the lessons I have learnt and hopefully it can help you and in the process help myself too.

Before I go into the details of my situation and what I have learnt, I find it prudent that I should provide you with more details on what I call the current “loan environment”. Financial institutions nowadays are making a lot of money from loan interests. So much so that it has become a core source of income for many of them. Because of people’s willingness to take up loans these days for a variety of reasons, traditional financial institutions such as banks and the non-traditional institutions like insurance companies and even post offices are coming up with more and more attractive and flexible loans for the consumer market. They include perks like easy approval, longer repayment payments and low minimum payments to name a few. All nicely packaged to lure the unsuspecting masses to take them up. I must concede that these loans are actually very useful and can help people in many ways. Bear in mind however that it is a double edge sword and if you are not prepare you will end up with more problems than the ones you are trying to solve.

Before I got married my credit balance was always hovering near the credit limit. Luckily for me I decided to clear it off as much as I could when I decided to marry. Right now I owe about $650 and I make monthly payments of $50 to $100. I wish I could pay more but already I am fully stretched. The good thing is that the balance is going down slowly because both my wife and me have enforced a strict no credit card usage policy. The problem is still there, any slip up and we will be back to square one but at least this is one problem that stands a good chance to getting resolved as long as we stick to the policy. The credit card is sometimes referred to as the “silent killer” when it comes to debt because it comes with many “pitfalls” that people do not see. It is okay to use the credit card out convenience if you can repay the full amount used when your bill comes. The problem starts when you do not. Using the scenario below, I will try to highlight some of the “pitfalls” and things that you must consider before using the plastic. It might get a little complicated but that is exactly how things are! Credit cards are not as simple as they seem. They are very complicated if you look at them in depth! I have found out the hard way. Imagine you walk into a store and right there in the middle is the latest DVD player on an introductory offer or maybe it is the latest designer handbag and it is on sale! You know you want it and it costs only $500. Ok, I am not going to talk about whether you should buy it but rather how you buy it. If you are going to pay cold hard cash then there really is no issue here but assuming you do not have that much cash with you and your devilish plastic starts calling out to you, be careful!

So you decided you need a new DVD player. Ask yourself if the purchase must be made there and then. If you answered yes, you will likely be using your credit card because as mentioned earlier you do not have the cash. Next ask yourself if you can pay back the amount in full when your bill comes. If you can then you do not have to worry too much because by doing so you will not incur any interests for the particular purchase. Here comes the complicated part. What if you cannot pay back the amount? If this is the case you must ask yourself how much interests you will incur? Will the interests you incur be more than the promotion or sales savings you are getting? If the answer to that is a yes then I ask you my friend, why do you choose to pay more? Is not the reason for buying the item there and then because you do not want to miss out on the savings offer? Would you not be contradicting yourself in this case? Of course you may argue that that the reason you bought it there and then is because you simply wanted it there and then and do not mind paying a little more in interests. So what if you split it into a few payments? How much interest can there possibly be? You must not neglect the question regarding your existing balance on your credit card before you make the purchase. Different credit card facilities having slightly different formulas for calculating interests. Should you be unable to make full payment for that last purchase how would the interest be charged? 0.5% on a $500 purchase is one thing, 0.5% on a total outstanding balance of $2000 is another. Let us also not forget about compounding interests too. Any interest incurred goes into your principal balance and that amount if left unpaid will get charged interests again the next month! In other words interests get charged on top of interests! A simple example will be look like this. You owe $2500 after the DVD player purchase and at an interest rate of say 0.5% per month you will owe $2012.5 the next, assuming you pay $50 and your balance goes down to $1962.5, come the following month at 0.5% you will owe$1972.3. The actual way the credit facilities calculate this is of course more complicated but in this case it is still healthy as your balance is going down. But what if you have a much larger balance than this and the interest rate is higher? Given you owe $5000 including the DVD and at 1% this time you would owe $5050. Again you pay $50 and it goes down to $5000 come next month you owe still $5050 again! You would be paying for nothing! This is still not so bad because at least the balance is maintained but what if your interest goes higher than what you can afford to pay per month? My suggestion is to have no balance at all or at the very least keep a healthy balance. If you allow your balance to increase then you put yourself at risk.

Credit cards can be like drugs because it is so easy to use and once you start you may find it hard to stop. You may have healthy balance now but it can pile up very easily without you realizing. A new DVD player will lead to a new TV and a new TV to a XBOX 360 and so on. If you ever allow this to happen than the only way to fix it is to increase your monthly repayment. If you cannot do so you have just screwed yourself. Again you might want to challenge me by saying that you nowadays there are interests free installments payment methods via credit card so there really should be no worries regarding interests. True if you can make your monthly installment payments in full but again I ask you what if you cannot do so? How would your interests be charged? Would your credit card facility charge you base on that particular month’s payment or on your principal balance? Bear in mind when you buy something under this scheme the amount you purchased is instantly added to your principal balance. To put it in perspective it would look like this. You owe $2000 and you buy the DVD player for $500 under the interest free scheme and the repayment per month for the player is $50. Your total balance would be $2500 but as long as you make the $50 payment your interest would only be based on the original $2000 come the following month. The extra $500 would be in a sort of “holding” status. This would affect the available balance for use on your credit card, which is beside the point. The key question here is because interest calculation varies form credit card facility to credit card facility, in the event you cannot make your installment payment would the interest be calculated base on $2050($50 from holding transferred to base sum), $2500(total sum owed) or $500(the purchase in particular)? There is also the matter of your existing balance. A monthly payment of $50 will go only into your installment repayment and your principal payment is still left unpaid and incurring interests! You must therefore pay more to satisfy both ends. This something a lot of people including myself have overlooked. So to rephrase everything, if you want to take this option make sure you can afford the monthly installments including your standing credit repayments else your interest free might not be interest free after all.

I am sure that by now you can see for yourself that the credit card is not so simple. I have yet to touch on cash advances from credit cards yet. In general cash advances from credit cards are not advisable unless you really have no other means because they come with a cash advance fee and much higher interest rates. I can go on to give more details on this but I think you are already beginning to yawn. So to sum it up on credit cards be sure you know how it works. Ask you credit card facility on how they calculate their interest and the actual rates. Being able to make the minimum payment stated on your bill may not necessarily be enough! A principle balance can be made up of different elements and each calculated differently. Make sure you know all these before you use it again or apply for one! And the golden rule to follow is to make very sure you can afford to pay off your interest and some of your principal balance every month or else you balance will never come down! It could easily cripple you!

(This can actually go under the credit card topic but then I decided to put it here because its only part of what I have to say. Part 2 will follow soon enough)