Costly credit, avoiding the bad deal.

  

Date Posted: 7/4/2012 7:43:05 AM

Posted By: meg soni  Membership Level: Gold  Total Points: 2477

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Nowadays,cheap credit is available from banks,financial institutions and financial services providers.there are credit cards;unsecured personal loans that one can get within 48 hours of application.While it is good and helpful there is something worth remembering about credit of all kinds;those who offer it do not give it for nothing.This is one reason why credit is easy to come by.Organisations that give credit advertise and make it enticingly easy to borrow. In fact,once issued with a credit card you have an automatic right to borrow up to your credit limit with no questions asked.

By granting you a personal loan,the bank,finance houses and moneylenders make a profit on the interest you pay.By giving you a credit card,the bank or other providers gain through interest and also cut the retailer''s (supermarket or petrol station,for example) profit on your purchases.No wonder shops are so willing to let their customers use credit when the profit has to be shared,the profit is bigger,since people paying on credit cards tend to buy more goods.

If you are thinking of borrowing money,or paying for goods with a credit card,work this simple rule;Never sign a bad deal.You might say that this is obvious as you might think.There are all kinds of reasons why people sign the worst deals imaginable;
-Because they think it is the best they can get.
-Because they are not bothered to look for anything better.
-Because they feel intimidated.
- Because they are desperate.

In each of the cases,the short-term benefits appear to outweigh the long-term costs of the credit. In some cases people can be in such desperate situations that they ill go to a moneylender or Shylock knowing they have no intention of paying back the loan. Some will even borrow Kshs.20000 for example,they have to pay Kshs.40000 back. No matter how urgent the need,never sign a bad deal.

Distinguishing

a bad deal from a good one

You need to consider two things.The first is how much the credit costs and the second is the risk of obtaining it.If you had to pay back exactly the amount you borrowed,using credit would present few if any problems.But borrowing is expensive.You always pay interest and sometimes other charges as well.Since rates of interest vary widely,it is essential to look around.All organisations legally bound to state the total amount they charge.

Here,the thing to look for is the annual rate of interest.Calculating this is hard but the lender should calculate it for you,and if he does not,then you should not be borrowing from him.The rate of interest is important because it enables you to compare one offer with another.The general rule is;the higher the rate of interest,the worse the deal. Remember,the interest will vary according to the length of the repayment period.Of course it is easier to pay back the loan over fifteen years at Kshs.10000 a month than over three years at kshs.70000 a month. That is the attraction of 'spreading the cost'. Still bear in mind that paying back quickly costs less.This kind of loan is called fixed-term credit.This is because you are told before the agreement what the repayments are going to be,and when they are due.These include personal bank loans,mortgages and some credit card accounts.Some credits however charge interest in a different way.For example,the borrower is given a pre-set spending limit and interest is charged at the end of the month on whatever credit is outstanding in the account.If you default you might end up paying more than you borrowed simply because of the interest.

Sometimes the amount owed might be so large that it grows through interest even as it is being repaid.The borrower takes one step forward and two steps backward.Whenever you borrow credit ask yourself first whether you will be able to afford the repayments and remember in signing a credit arrangement,you are committing yourself to pay off a debt with money you have not yet earned.If the deal looks too good,walk away.

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