The Problem With Borrowing

📆This Week’s Topic

This week we are talking about borrowing as a problem and as a strategy guide. We will be discussing credit cards, car loans, and financing apps. I want to inform you about the hazards and benefits of these different borrowing types. Anyway, lets begin by talking about credit cards.

💳 Credit Cards

Credit Cards are a very unique way to borrow money because there is no collateral involved. What that means is that for example if you were borrowing a house and did not pay back the loan for a certain number of months the bank would foreclose on your house and take back your house. With credit cards this does not take place. If you buy a $50,000 wedding on a credit card and you don’t pay it back the credit card company will just keep charging you interest until you can no longer pay. Credit cards charge you 20-30% interest annually on your unpaid balance . Although, most credit cards offer rewards; the amount that the companies charge in interest is far superior to amount of rewards you are given. The way to avoid these interest payments is by paying the balance off fully every month. Another strategy is to keep your debt utilization under 30%. That means if your credit limit is $1,000 you never reach a balance on your credit card that is higher than $300 until your credit limit increases. With both of these strategies in use you should have no problem gaining all your rewards while avoiding interest.

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🚗 Car Loans

The next type of loan I would like to talk about are car loans. Cars are one of the worst investments ever because they are deprecating assets. Some assets like houses tend to go up in value, but cars just go down in value. The minute they leave the dealership they lose 7-8% of the value due to the profit that the car dealership makes on your car. Although, for most people owning a car is a necessity. The best way to approach this to save for a used car and buy it with cash. Some dealerships offer a cheaper final price if you finance the car. If your dealership offers a cheaper price for financing you should accept it. Then as soon as you can payoff the entire loan at once. You shouldn’t buy a car an expensive car. Cars lose value and they can hurt your finances if you spend too much on them. Expensive cars can lose value just as quickly as cheaper cars can decrease value. Make sure you also buy a used cars as new cars are a lot more expensive. If you utilize these strategies you will be paying a lot less money and interest for your car.

💰 Financing Apps

I also am going to mention financing apps. Financing apps like Klarna & Affirm have been growing rapidly. The main feature of these apps is the Buy Now, Pay Later service or BNPL. This is where the customer finances a purchase with the app and pays for the item in multiple payments. For example, if you use Buy Now, Pay Later on Klarna you have 2 main options: 4 payments or in a month with no interest or longer term financing with up to 36% interest. Klarna is bad because if you pay for a meal that you could not afford and you unable to pay it back in a month or in 4 payments, you will receive huge interest payments until you pay it back. 2 interest payments is more than half of the original borrowing price. Another recent addition is Klarna working with DoorDash. You are now able to split your DoorDash payment into up to 4 payments. This is bad as if you can’t pay for a $20 dinner at once you cannot afford it and should not get it financed. Klarna’s net losses have doubled as their customers are not able to afford to pay back their loans and some of the them are defaulting on their loans. With these apps consumer debt has skyrocketed to $18.2 Trillion. You should never use these apps as they just make you take on debt and if you need a loan for a $20 purchase don’t buy it. If you do that you should be good.

⏳ Final Summary

In summary, credit cards can be a helpful tool if you do not mismanage it. Car loans can be fine if you handle it properly. You should not use Klarna or other financing apps. If these things are mismanaged you credit score could drop significantly and you could even go bankrupt. You need to manage these borrowing methods effectively to have good financial health.

🙏Thank You & Important Information

Anyway, thank you so much for reading this edition of Friday Finance. If you would like to browse more article made by Friday Finance, go to fridayfinancedc.com and click the archive you can browse all our previous articles. Anyway, have a great week and I will see you next week.

Jacob Gans

Friday Finance