Understanding the Principle of Personal Debt

by admin on

Managing your debt is an integral part of an individual’s personal finance. Ideally, having no debt would be the best thing that can happen to you. But we don’t live in an ideal society and like most families we incur debt. For instance, it would be foolish to buy a car in cash or a real estate property without mortgaging it.  We set aside money for education but we still end up BORROWING money just to cover the deficit of our educational expense. Incurring debt is sometimes necessary and at times desirable especially for things like education. The catch here is to know how to borrow money with a low interest rate for a high end investment.


Debt Means Using Other People’s Money 


Incurring debt simply means that you are purchasing things using other people’s money. A classic example of this is the use of a CREDIT card where you purchase things and pay for it at a more convenient time. Taking out a PERSONAL LOAN has the same principle. In return for using money from a MONEY LENDER, the latter is entitled to be paid with interest.


No Such Thing as 0% Rate


When people loan you money, you can be sure it’s never interest free. It just seems that way especially if you use a credit card to purchase the said items. They usually say the cost of the item is interest free but the interest itself is already included in the price.


Debt is never bad; you only need to understand it


Personal debt comes in various forms. There is the Property mortgage, a long term loan that may take 10 to 25 years to finish; home equity loan and car loan considered as intermediate-term loan which last about 5 years and there is the short term like those incurred by credit card or personal loans taken from any financial institution. Remember that the longer the term of the loan is, the lower its interest rate is; but in the same scenario you will be paying more for a long term loan especially if the interest on the amount is compounded monthly.

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