Knowing the Borrowing costs in Credit

To Leverage or Not in Credit?

The powerful thing about leverage is on the ability to expand at an increasingly manner that borrower's current circumstances forbid. This authority may blackfire anytime should it be abuse by the lendee. A conventional wisdom states that, "To be or not to be, that's the question", hence tapping on future cash is deemed as short term borrowing in expectance of reaping better rewards in the long run. Not everyone is suited for being borrowers. Just by looking at the interest rates piled up from credit cards and debts will one know who is responsible in handling finances and who's not.

Pros & Cons of Credit 

Before indulging on Credits, make sure that an individual is well aware of the risks and costs of borrowings. Certainly, there will be advantages in leverage, else what's the point of utilizing, but do note that the cons might come back to haunt you if not being managed in a prudent manner. One of the key points why Credit is such a beauty is because the lendee may use it to gain bountiful returns by enhancing current investments or buy new properties that can be rented out for "passive income" over the next few years while covering mortgage loans. Some prefer to setup small businesses using credit lines from personal loans to be owners and out of the rat race. Who says increase lifestyle equates to having more debts? In fact, many borrowers are successful in putting more cash on the table by purchasing new houses, renovating & renting or even investing in other peoples' businesses for recurring income.

Active vs Passive Borrowing costs

Firstly, an individual who wants to take up loans need to have the necessary knowledge in borrowing costs. There are two main components; Active vs Passive risks. What's so important about this? When it comes to active approach, loan repayment schemes and penalties come into mind. The costs of borrowing depends on the loan tenor, types of loan as well as the risk profile of the borrower. All these factors contain significant impact in ruling out the possibilities of loaning. How about passive risk? It is something not obvious but still working round the clock at the backend. Such risks are like global inflationary pressures or government's interventions in certain policies. Based on the average interest rates, it stands at 3% per annum, which forces the loan repayments to increase without the borrower noticing anything. Should government make unfavorable rulings like reducing tenors, the impact will be put on lendees. All these constitute to the importance of understanding risks.

What to leverage on and what not

The final piece to the puzzle is to ask what to leverage and what not. Based on past statistics, those who borrowed for speculative investments often faced with massive debts and finally reaching bankruptcy, with personal debts irrecoverable to relatives & friends. Such cases originated from  indulging in gambling activities, owing private moneylenders, leading lavish lifestyles, overstretching finances in high-end condos & European cars. These financially unhealthy activities made an individual's credit rating degrade and creating social problems over the long run which are costly to repair.

If the borrower has planned out on the necessary credit debts, the implications are proven to be less harsher in reality. Let's say an individual wants to expand his business by leveraging on credit lines. After weighing out the possiblities and risks, he initiated a bank loan and act accordingly to his path, in an event something bad occurs, he has contingencies to mitigate the issues. If everything proceeds in a smooth transition, he'll have the luxury to either expand further or be contented with his financially healthy lifestyle. Choose what to leverage on wisely.