The one golden rule for using credit, that borrowers should understand, is that the usage of credit is just as important as who you get your loan from.
Once your credit has been approved, you may be tempted with many options on how to use that money. Give serious consideration to the ways you will spend your money, otherwise before you know it, your money could be gone and it will feel that all you are left with is the monthly repayment.
There are two types of credit and it is important to distinguish between them.
Consumption Credit: This is borrowed money which is used to purchase items that are non-durable, or will be used up. Items such as clothes, food, transport, household items, furniture and the likes. These types of items generally don’t make you more money in the future.
Development Credit: This is borrowed money which is used to fund activities that are considered to be an investment that will produce a future value. Activities such as funding education, buying a house or making home improvements, investing into a business or buying shares. Using your borrowed money on these types of activities, will either lead to the growth of your income or to the increase of your lifestyle as a whole, into the future. Taking a loan to study further is a good example. Once you graduate, you will be in a position to secure a higher paying job. Likewise, improvements to your house will add value to it, when you are ready to sell it. Or starting a business can bring in extra income.
In actual fact, using credit on consumption items generally costs you more than using the same credit to purchase development activities.
It is possible that someone may fall into dire need and a loan is the only option out of trouble. But for all other purposes only take out loans that will result in, and contribute to, an improved future. The iconic investor Warren Buffet once said that price is what you pay and value is what you get. Make sure that the value you get from the loan will outweigh the monthly instalments you’ll be required to pay. Look at the big picture.
