Monday, 28 December 2015

Personal finance: "Is it a good idea to take a bank loan to finance pure consumption?" - Probably not.

Currently, there are so many credit institutions offering loans for pure consumption such as for e.g. vacation, a car, a boat, a new mobile phone and whatsoever.

In principal, I'd recommend you not to do that. The reason lies in the attribute of consumer goods not to generate cash flow in future. But to payback your interests and debt amount you will need future cash flows.

When you take a loan, first you get cash inflow, which is followed monthly by cash outflows. But when you go on vacation with the borrowed money, you probably won't generate any cash. Probably, you would spend additional money for joy activities etc.

In case, you would expect a cash inflow - such as end year bonus from your employer - then taking a short-term loan would be ok, otherwise you better stay out of debt to avoid liquidity problems followed a downgrade of your personal credit rating.

If you take a loan to buy an asset (to make an investment), this would be a different story, since buying assets starts with a cash outflow theoretically followed by regular cash inflows, which automatically can be used pay down your interest and debt amount over time.

Be careful of risks: there are less risky assets and more risky assets. If you take a loan to invest in a risky asset, please be aware that you could also end in misery.

To be financially safe, you'd better adjust your spendings to your monthly income.

Golden rule: spend less than you earn.

Living the exclusive life. With heavy loads of debt. Congratulations




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