Taking a loan is one of the most important tools for development of the economy in both macro and microeconomic. So speaking, the loan and the access to fresh money, even more expensive in the end (because of the interest) is important for our development. However, when it would be wise to loan money and most importantly for what? This is a very important question that everyone should ask him or herself if one wants for real to have improved his financial situation after the returning of the loan.
The idea of acquiring new money by a loan is to bring additional benefits and opportunities to work with. Unfortunately this is not something most of the people would think about when they decide to take a loan. Some easily decide to borrow money only to meet some needs of their that are neither urgent nor will yield additional benefits in the future.
Let’s look at some examples to see whether a loan would give us additional benefits or not.
If for example you have an old car whose maintenance and running costs have risen in the recent years and you want to replace it with a new one, but you lack money. Should you take a loan or not? The calculation is simple – on one hand you have the increased costs for the car, higher fuel consumption and on the other you have the interest on the loan, which has to be paid. If the two are equal or the column with the cost of your car has higher values, then taking credit to buy a new vehicle looks like a good opportunity, because in the long run it would save you money.
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Here is the second example. You want to go on a luxury vacation, but you lack money? Should you take a loan or not? What would the additional benefits be for you? Eventually, after a luxury holiday week you would feel better and be more productive, but would it directly reflect on your budget? If you’re taking a fixed salary I would say you most probably wouldn’t get more money even if you work better in the next few weeks. So, you wouldn’t have any direct financial benefits of taking this loan. However, you have to pay the interest and you would have a net loss to your budget.
It is good practice every time you evaluate whether to take a loan or not, to calculate the income and expenses that you would accumulate in the coming months and years. In this way you can make a better judgment whether you would benefit or not of taking this credit.