We live in a society now where most of the population can’t afford to make large or major purchases such as a car or a house. Most of the time these large purchases need to be split into smaller payments paid back over the course of a few years. Each payment is then settled on a specific date of every month with some additional fee as interest. This is a type of loan called financing. It is the supply of making purchases provided by some sort of financial institution. This type of loan is vital to the function of the economic system. Without it, businesses and people would not be able to afford most products or equipment that is otherwise out of reach.
Here are some reasons why applying for a loan might be a good idea.
Time value of money (TVM)
The time value of money is the concept that money available at the present time will be worth more than the identical sum in the future due to its potential earning capacity. This is a core principle of finance holds that provided money can accrue interest and is worth more the sooner it is received. This can be demonstrated with an example of a small business. The business is a lawn mowing business. The choice is to finance a truck to be able to extend your reach and get more clients, or stick with the current client base and slowly accrue income for a new purchase. The concept here is that buying the truck will let you get more clients and expand your business faster, making you more money in a shorter period of time. This is an example of where the money is worth more than its current value. Sure, you have exchanged that money for a fair value in a vehicle, but the ability that the vehicle gives you to earn more money makes that loan value much higher than its present sum.
Financial lingo can be difficult to pick up on and even harder to understand. Fortunately, we live in the age of technology and information is freely accessible. When finding out more when financing, make sure you use all the resources at your disposal. Websites with definitions, terms, and financial calculators you need are all available online to make your loan that much easier. These calculators can help you set up a loan exactly under the conditions you want so that you will not be caught off guard when your first month’s payment comes in and it is not what you were expecting.
One of the best times to finance a car is in a very specific situation. If you have the cash saved up for your new car purchase, instead put that money into an investment with a return percentage higher than your financing percentage. Over the course of those payments, your money will end up being worth more than when you started. This is only really a viable option if you have the money saved up and you are extremely disciplined. Many people don’t have what it takes to keep extra money put away. Once we get out of school and start earning money it seems like there is a lot coming in and we tend to spend it and develop bad habits as a result. These bad habits carry over into our adult lives and cause us a lot of grief.
Pay it Forward
One of the advantages of having monthly payments is that if you find yourself ahead in bills, then you can actually start paying the next month’s payment and so forth until the car is paid off. Once it is all paid off, keep making those same payments but instead in a savings account that will become your new car fund. This is a great way to start saving up for that new car, before having to worry about it. In the worst-case scenario, you can always use that money for emergencies such as repairs.
To sum up, taking a loan out should not be your first option. Firstly, consider if you have the funds available to pay off the said loan. Secondly, consider the time value of money and if it can be used in your favor. When shopping for a car, try to find the lowest possible interest rates and then use that money that you would have on an investment. Manipulating the time value of money is the best way to go around saving a dollar or two. Lastly, pay it forward. It’s difficult to put money aside. If you find yourself with a few extra dollars at the end of the month, then consider throwing that money towards paying off your bills or loan faster. This will set you up to develop better money management skills as you develop further in your life. Remember to always ask questions, don’t be shy, it’s your money, stay informed about it. Good luck and happy purchases!