Getting more value than the interest you pay for

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KRISTEL SILANG

There are many triggers on why someone gets into debt. They could range from paying a tuition fee, funding an overseas trip, or buying a new gadget. But what is the basic meaning of debt and how does a temporary financial solution like this affect our everyday life?

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Debt is money borrowed by a creditor from a lender when he passes the financial assessment that proves his ability to repay the debt. This is through a mutually agreed upon terms of payment, such as a one-time payment, a monthly amortization of a fixed amount for a duration of time, among others. While an individual borrows a fixed amount of money, the lender puts additional costs such as an interest rate and late payment fees on the principal debt to earn from this transaction when the due date comes.

Some forms of debt that are accessible to individual borrowers like myself are personal loans and credit card debt. While banks are the main sources of these kinds of debt, there are some emerging financial technology companies that make information about financial services conveniently available to individuals, such as comparison websites like MoneyMax.ph. By convenience, this means you can compare more than 120 options of credit cards anytime you want and anywhere with an internet connection.

As I mentioned earlier, there are many reasons why we get into debt. And because we can apply for one in less than a minute, there’s a chance of getting one without thoroughly thinking about its long-term effect on our expenses. For example, borrowing P30,000.00 through a credit card or a personal loan. The annual interest rate you’ll get is 27 percent if the credit card incurs a 3 percent monthly interest and the total debt can go up to P38,100 if left unpaid for a year. If you decide to borrow the same amount through a personal loan with a 13.2 percent interest rate, this amount will go up to P33,960.00.

Our emotions can get the best of us when making money decisions such as obtaining a loan. If access to financial services has been made a lot easier now, then we should exercise more caution and discipline on major money decisions such as getting ourselves into debt. One practical approach: compute first if the item you are buying by your credit card will help you in some way to also earn money when you use it. If you’re buying a laptop to be able to accommodate more freelance projects, which you expect will earn more than the personal loan you need to borrow to buy it, then that would be a better bet than to borrow the same amount to go to Hong Kong over the weekend just to unwind. Another good reminder, which should raise a red flag, is if the monthly amortization you need to pay is 40 percent or more of your net income, then it would be hard to buffer money for repayment in case of income loss and that could result in either a drop in your savings rate or a drastic cut in your daily expenses.

Having said that, being in debt is not absolutely bad. There have been some instances when I used personal loans to pay for medical expenses and buy a new smartphone that now provides me faster internet access and a larger capacity for storing podcasts that I like listening to in the midst of heavy traffic on my way home. It’s just a matter of discernment whether getting into debt either through financial institutions or people you know will be worth it. I’d say that I got the best of both those loans I mentioned since I got more value than the interest I paid for.

Kristel Silang is a content manager at MoneyMax.ph, a financial comparison website aiming to help Filipinos save money through diligent comparisons of financial products.

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