Taking out loan entails cost

Wherever you advertise a loan, you see the warning in large letters nowadays: Note: Borrowing money costs money!

 

But how expensive is money really? And should you be put off by the negative stories you sometimes hear from people who have taken out a loan ?

The short answer

In short, there is no denying that borrowing money entails costs. The party that advances money must finally also make a profit on the service it provides. In practice, this means that you pay a certain percentage of interest on every borrowed amount. So the amount you pay back will always be higher than the amount you initially borrowed.

The real answer

Nevertheless, borrowing can be beneficial. After all, it gives you more freedom to make large purchases without having to save for years. The art of borrowing is therefore not the art of repaying or the art of being economical. The art of borrowing is the art of planning. The two most common loan constructions are a revolving credit and a personal loan.

A revolving credit

A revolving credit is suitable if you do not want to borrow a fixed amount but just need a buffer, a kind of piggy bank where you can occasionally withdraw money if you’re short of time. The advantage of a similar loan is that you can pay off at any time and that you can also borrow the paid amount again. A revolving credit is therefore a flexible loan that can adapt to your life and your wishes. The disadvantage is that you never know exactly how long the loan will last and that the interest rate can change during the term.

A personal loan

In that respect, a personal loan is a lot clearer: You borrow a certain amount once and then pay back part of it each month, including a predetermined interest rate. A personal loan is therefore especially advisable if you need a one-off amount, for example for buying a car or renovating. From the moment you take out the loan you know how long you are attached to it. The disadvantage of a personal loan is that you can not pay off the borrowed amount with the majority of the lenders. After all, they earn money on the interest you pay on a monthly basis and therefore lose income if you suddenly pay off the loan faster.

The correct answer

Borrowing money is basically the same as spending money: You can only do it once. Borrowing money is certainly a good method to have money, but it goes without saying that you have to do this carefully and that you should be well informed. A revolving credit is flexible but uncertain. A personal loan is clear but rigid. It is ultimately up to you to determine how your character and your spending habits best suit a loan, and how expensive a loan will be for you.

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