In what cases is it rational to take a loan?

If the amount of your savings is not enough to finance a desired purchase. Before applying for a loan, we recommend considering how rational this step is.

Take into account the following:

1. A too big loan can lead to problems with repayment. Take exactly as much as you can afford to repay without extra effort and be 100% sure that you are informed about all expenses (interest / fees).

Example of calculating the optimal monthly repayment:

Monthly loan repayments should not exceed 70% of your monthly savings. For example, if the income = 1000 lei and the expenses = 800 lei, then the savings = 200 lei. The maximum amount of monthly payment should be 140 lei.

Savings are the difference between what you earn and what you spend. Include the income you are fully confident of receiving every month.

1. Avoid taking out several loans at the same time: having more than one loan puts you in front of a greater risk of over-indebtedness. The amount of the monthly payment for each loan may seem relatively small, but the total amount you pay will become a heavy burden on your family budget
2. Avoid taking credits for desired, but unnecessary items

The rational purposes of contracting a loan include:

1. Launching your own business, that will bring you income in the future
2. Purchasing the property: repaying the loan, you own property and do not throw the money in the wind
3. Personal education and training: a higher qualification must bring a higher income in the future
4. Home improvement: for example – repairs made with the aim of saving electricity or purchasing energy efficient appliances helps you save money on bills

Risky purposes of contracting a loan include:

1. Coverage of other debts
2. Holidays and luxury items
3. Parties and gifts

Source: http://mfc.org.pl/check-your-financial-health/

Choose your financial partner in an informed and responsible way.

GMW March 25-31, 2019

www.globalmoneyweek.org

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