Buying items on manageable monthly repayments is a whole lot easier than a one lump sum payment. You can justify a few extra bucks a month a lot easier than you can explain dropping a few hundred or even a few thousand on something before you even take it home with you.
Unfortunately, this is flawed thinking, and it’s something to which a lot of people fall victim.
Having some debt in some instances is okay, especially when the cost of NOT having something is more significant than the cost of having it. An example would be if you could get a much better job on a higher salary by financing a new car. That would translate into a good investment. You would be making monthly repayments on the vehicle, but conversely, you would also be making a lot more money in your new job. By taking on the additional monthly repayments, you have made a financial gain.
Another example is a mortgage on a house. Your house will increase in value, hopefully, over time, so making monthly mortgage payments is a kind of investment. You were going to have to pay rent anyway for no return. Therefore a mortgage makes sense unless, of course, you can’t afford it.
Not so Clever Debt
You can’t apply that sensible logic to buying a big screen HDTV with surround sound though. You want it badly but don’t want to, or cannot afford, the two thousand in cash. So you opt to buy it using finance, pay nothing at purchase, payments start in six months. After the six-month sweetheart deal, you will be paying twice as much for that TV over time. As an investment, the TV is not going to pay you back anything, unless you charge people to watch it.
Wants and Needs
The TV is what is termed a ‘luxury item.’ It’s not an investment, and it’s not a vital thing that you need to survive and stay healthy. It’s something you can live without – a toy. A want rather than a need.
Can’t Make the Monthly Repayments?
What happens if you have too much debt and you cannot make the monthly payments? Firstly, you start getting letters of demand in the mail. Then somebody might come around to your home and take your TV away. Now, you have no TV but you still have to pay back the loan. If you allow the debt to continue, it might be passed onto a collection agency, and that starts a barrage of letters, phone calls and possibly unwanted visits.
Your Credit Rating
By not keeping your debt under control, the default is now recorded on your credit report, and that means a lower credit score. The next time you want to buy something or apply for a loan, it’s going to be a lot more difficult.
The Monthly Grind
The above is a standard scenario, only the purchased appliance or item may change. It could be a car, your home, a boat, or your credit card, all of which have monthly repayments.
Regardless of the loan or the reason for it, they all carry the responsibility of repayments on a monthly basis.
- Statement Date – This is the date when your statement is printed, and it will show all the loan details, the purchase, and the amount due.
- Total Amount Due – This is the sum of any unpaid amount from the previous month and all the new charges and fees added for the month.
- Minimum Amount Due – This is a small percentage of the total amount due. It is the minimum payment you must make to retain your good credit standing with the lender, and ultimately affects your credit score.
- Cash Flow – It’s crucial that you work this out accurately. Take into account all your living expenses, food, utilities, transport costs, gas, entertainment, and clothing. Then add to this total your monthly loan repayments on personal, home and credit cards. Cross your fingers that the monthly household income is more significant than the monthly household expenses.
Things You Can Do
Instead of wringing your hands and tearing your hair out with worry about your inability to make monthly repayments, there’s a couple of things you can do.
The main thing is not to stress and despair. There is always a workable solution.