The FINANCIAL -- Debt can enable you to enjoy things that are otherwise beyond your current reach. Borrowing can also have an ugly side though. Too much, too expensive, or the wrong kind of debt can make life miserable. In which currency to borrow, how to distinguish good and bad credit, and when do you really need a credit - these are the main issues that need to be considered in order to make money work for you and not vice versa.
In which Currency to Borrow
As a wise person said, one should always borrow in their national currency but save and earn in foreign. Many believe that all credit commitments must be in the currency in which they earn, but this assumption is absolutely wrong. Stability of the market is the most important aspect. Otherwise, however good your work is in a foreign company and even if you are paid in foreign currency, the company will leave the market. So, you will have to meet your credit responsibilities with local resources. Credit obligations are spelled out in a contract. So, it is impossible to get rid of it.
You should perfectly understand that by taking out a loan you can no longer quit the job if you dislike the director or because you are tired. Liabilities denominated in foreign currency, tied to a particular source of income, further exacerbate this fact.
As for the banks: the bank is a commercial business, which is primarily concerned about their finances. Do not forget that local banks need to keep costs in Lari and lend you a foreign currency for their own benefit.
We all need to understand that, since we do not have strong production and good export, for a small country with a negative trade balance, strengthening of the national currency does not prove much.
Inflated cost of credit in the national currency is much more profitable than loans in a foreign currency with tempting low interest rates.
Let’s discuss taking out credit during a relatively stable time, like 2013, in a foreign currency, to the amount of USD 20,000 for a 5-year term with a 10% interest rate. Monthly payment would total USD 264.30.
At the time of taking out the loan, including commission in the national currency, it would be worth GEL 53,256, while the exchange rate is at GEL 1.68. Considering all the monthly devaluation of the national currency the volume of payment for today would already total GEL 23,000. GEL 46,000 would still remain to be paid in the case of absence of dramatic predictions and hoping that the GEL would continue to strengthen. Thus the total payment would amount to GEL 13,000 more. All because the credit is in a foreign currency.
Now compare that to if you originally would have taken out a loan in GEL with an “extremely high” percentage. USD 20,000 was GEL 33,600. The annual interest rate of the credit would be 15% and the term - 10 years. In this case you would have to pay GEL 542 per month. Total cost of the credit, including interest rates, would be worth GEL 65,050. Considering again the fact that it is necessary to pay more for a long time, think about what risks you are more likely to expect, taking into account that the splash was one-time and then in 2015.
Good and Bad Credit
Money is a certain means by which we are providing for ourselves, what we actively wish, whether it is a business, home, car or phone. Such financial instruments as loans are useful to speed up this process.
By getting a financial commitment, we need to understand: how ready we are to serve the loan and whether the money accepted will bring us benefit.
The money can work for you as well as you having to work for the money. This statement just explains the essence of good or bad credit. The point is very simple. It means that if by using a credit you can earn more and thus serve the debt by the credit itself, the credit is good. Its goal is to bring you more money today, not after many years of accumulation.
For example, you have some business, concentrated in one place for geolocation and you know perfectly well that opening a branch will contribute to the growth of your income. Meanwhile to accumulate funds for the expansion you need 5 years. And by providing this with the help of borrowed money the project will allow you to make money today. This is good credit. As well as if you would be a highly specialized expert and purchased a special tool with credit, using which would expand your range of services, so that your income would increase.
A mortgage is one of the most common forms of debt, but while buying a house on credit people often think that they are making an investment in the asset. In fact, a house purchased with a mortgage is a bank’s asset. As it ensures that you will give the opportunity for your lender to earn, and for you your home becomes a liability. It will always require you extra costs, but the worst is that it will cause you to live without change and the possibility of further development. In our country, where, unfortunately, the commercial sector is living on its last breath, and your job is not insured, by buying a house with a mortgage you are getting bad credit.
A bunch of credits can be included in bad loans. However, unfortunately, it is hard to live without some of them. While collecting a portfolio with loan responsibilities first of all you should think about whether it can insure itself, directly or indirectly. Remember that bad credits are most profitable for the banks as they are the most liquid product and generate the most profit by developing a portfolio of assets.
Life with or without Credit
From 2011 and 2014, 700 million people became account holders at banks, other financial institutions, or mobile money service providers, and the number of “unbanked” individuals dropped 20 percent to 2 billion adults, said the latest report of the World Bank.
Credit is a tool and asking whether it is possible to live without credit, the answer is simple - yes, but why? With debt financing, you can speed up the process and meet your needs today. The most important issue for you is to determine how you will provide for it and what type of loan it is, whether it will be for you a long-term commitment or facilitate your life, bringing you steady income. While deciding how to finance their goals people do not pay much attention to studying their own resources. Let’s consider one example: in order to achieve some new goal which will move you forward with credit funding you should think about any already existing resources. Getting money is possible by selling some asset which does not bring any profit or brings only small profit and is much wiser to change for something more profitable.
Credit - this is just a tool that is on a par with any other financial instruments that contribute to you achieving some goals. In order to decide whether or not to use it, you just need to firstly study all your resources.