Loans: The good, The bad, and The Ugly
Why should you use installment payments instead of a traditional loan?
Before we can answer this question, we must first understand what a loan is.
So, what’s a loan?
A loan, by the conventional definition, is money ‘advanced (by a third party) on the basis of the borrower’s credit-history and ability to repay the loan from personal income.’ (business dictionary)
In addition to paying back the loan, you also have to pay interest. Interest is the carrot (or incentive) and security for a third party to part ways with their money for a time. Also, there are fines and penalties if you don’t pay back the money according to the agreed terms. These factors need to be considered, even if a loan offers “interest free payments” up to X number of months.
Traditional loans are, basically, you borrowing money from somebody or an entity (usually a bank), to make a large purchase. These loans are often used to buy a home (aka mortgage) or a car, to renovate your home, to pay for a vacation or finance a wedding, or to deal with an unexpected event, such as: a funeral, a car accident, or a plumbing crisis.
When it comes to purchasing a new car or buying a house, getting a loan makes sense. You are asking for a lot of money upfront to buy a valuable asset that you will own for a considerable amount of time (hopefully). Most of us don’t have this kind of cash just lying around.
But, taking a loan to pay for a wedding, to take a well-deserved vacation (since we spend most of our lives working), or to cover unexpected events…well, that’s just not fair. Why should you go into debt, just because you want to spend time making special memories with the family, or because of something that you have NO control over?
Responsible “loan” option for those bigger ticket items
When you use installment payments, you are not borrowing money from anyone else, like you do with a loan. You are using your own money, which means instead of being indebted to a bank, for example, you are indebted to yourself; which is the responsible way to spend.
Installment payments offer you the option to use your existing credit card to get an advance on things, like, a wedding dress, flight tickets, a stroller for baby, to upgrade your couch or mattress, or to deal with matters like housing emergencies. In other words, things that will enhance your quality of life, help you create memorable experiences, reduce the amount of stuff you end up throwing away, and help take care of the unexpected, but necessary costs.
Don’t spend. Invest.
Invest in a new mattress that will improve your quality of sleep, replace those cabinet doors to increase the value of your home, or finally buy that couch you want to create the perfect relax-after-a-long-day-at-work, snuggle-on-the-couch-and-binge-Netflix environment.
Spending your hard-earned money on the more expensive and better quality option, instead of opting for the cheaper, probably-will-break-after-several-months version, is a great way to focus your spending on things that actually matter and that you will value. Who knows…spring cleaning just might become a thing of the past!
Yes, loans are still an important financial tool; just not for every purchase. Don’t empower the banks that put you in debt. Use your own money without fees or penalties.
Today’s world requires more up-to-date financial options that allow us to live well, and not go into debt, but instead help us to remain in control over our own finances.