Personal effects loans cover borrowing for a wide variety of reasons, where you borrow money for exchange for something tangible. Mortgages for buying real estate and car loans aren’t included in this category, nor are loans that involve bettering yourself such as spending for education, or borrowing for things such as vacations, as we’ll just be talking about buying what are generally considered to be personal effects in this article.
Why should we look at personal effects loans separately from, say, car loans? For most people, owning a car is considered almost essential, and even if you don’t own one, most people would still incur expenses for transportation, and may not be able to go where they want when they want either with these other options.
In deducing the value of a loan, we’re always going to need to consider what the benefits are, ,which involves both the benefits of buying the merchandise in this case and the benefits of buying it now rather than later.
In most cases with personal effects loans, we’re not dealing with things that we actually need now in the strict sense, with the exception of someone who is starting out and is looking to furnish an apartment and currently does not have the means to do so without using credit.
Even so, this situation will involve decisions about the quality of the personal effects that are being considered, and while one may probably not want to sleep on the floor, one could usually buy used furniture or furniture of a lower quality, so the amount that is to be borrowed will depend on these qualitative considerations, as personal effects loans do generally.
This is the case as well with appliances for instance, where your appliance has failed and you require a new one. You could have it repaired perhaps, or buy a used appliance, buy a modestly priced new one, or a higher end appliance. All of these decisions are going to affect how much you borrow.
Buying Personal Effects With Our Own Money
Deciding how to spend one’s money, and in particular, the decisions whether to buy one item over another is all part of personal financial management. Unless one is extremely wealthy, where money is not a concern, there will always be opportunity cost involved when we spend money, where we need to compare the value we receive with the opportunity cost of not receiving something else we could have used the money for instead.
In cases where we’re buying these personal effects with our own money, these decisions primarily come down to what we can afford to spend on the item, or whether we can afford to buy it at all. In spite of the complexities involved here in coming up with even a decent quality calculation, people generally do not think of these things that much.
Buying first and asking questions later is more the norm, although this most often cashes into only asking questions when we run into difficulty. Often, when we do ponder the wisdom we have exercised with our finances over the years, it is too late, like for instance being in retirement and wishing we lowered our standard of living a little during our working years to prevent a much bigger lowering that we face now from not having saved enough.
Western culture has always been driven by spending, where we’re subject to tremendous amounts of advertising every day, as well as other influences and beliefs that our culture normally holds, and this results in our spending a lot of our disposable income on things like personal effects.
Other cultures may hold saving money in higher regard and this can influence people to save less and spend more, which may end up being to their overall benefit when you look at how well they may have achieved their financial goals during their lifetimes.
This is not to say that spending is a bad thing, and spending more may deliver much additional enjoyment, such that it may easily be worth it, but we do not want to approach all of this mindlessly. If we at least consider what we could do with the money instead, and try to come up with at least a feeling of what may be the better decision, then at least we’ve created an awareness of opportunity costs.
How Borrowing for Personal Effects Differs from Buying with Cash
An easy rule of thumb here would be to decide on these purposes based upon the amount of money we have, as a general rule, which means that we should only be borrowing for them when really necessary. Saving up for items also causes us to have more time to reflect on the purchase, reducing the risk of deciding and buying impulsively, which often happens when we borrow to buy the stuff.
When we buy with our own resources, the true cost to us also tends to be more transparent. If you have saved up a certain amount of money for a certain amount of time, the price has already been paid so to speak, and you get to make the buying decision with a full realization of what it took to acquire the money.
When you borrow to buy it, there isn’t much of any thought needed prior to the buying decision, and this can easily lead to decisions that may not be feasible or may lead to regret later. The price so to speak is in the future, and one can choose to think about this price to whatever extent that one chooses, including not thinking about it at all.
This is the perfect situation for those who are looking to sell to you, as you can just focus on the benefits and don’t have to focus much on the costs and this can create a view that is quite skewed toward the benefits side.
Sure, it would be nice to have this new furniture for example, even though the old furniture may be perfectly fine, but this new stuff is nicer, and it would be nice to look at and sit on something else for a change.
It may be more reasonable to just save up for these items, but the magic of credit can make them appear now, without having to wait. Just sign on the dotted line and they will deliver it in a few days rather than waiting until considerably later.
At a minimum, we need to be considering the additional cost that borrowing entails, which may be anything from fairly modest if the rate is on the lower side and the term is on the shorter side, to much higher if one is putting the purchases on a higher interest credit card and the expectation is that it won’t be paid off for quite a while.
Whatever the additional cost, we will be well served to always look to figure this out, and then decide whether this extra cost is worth it to have the personal effects now. It very well may end up that the deal is worth it, but if we don’t think about this, this can lead to mistakes, even big ones.
Many people are in way over their heads and have to remortgage their house, or default on their loans and even declare bankruptcy, from not thinking enough about whether they should buy personal effects ahead of time by borrowing the money.
Every time you add a loan payment, you are foregoing something else, so you want to make sure that you can both handle the new payment and are happy about spending this money on the purchase versus not making it and using the money you are paying back the loan with for something else.
It really doesn’t take a lot of deliberation to decide what you are doing and make at least decent choices, but this does require at least some objectivity and at least some thought. Given how badly people often mess things up here with consumer debt, as well as the importance of sound personal financial management, this is time very well spent.
Strategies for Borrowing to Buy Personal Effects
Should we end up deciding that borrowing here is the right course of action, and the benefits of doing so are worth it to us overall, we then need to decide how we’re going to borrow the money to purchase the personal effects.
One of the reasons why it’s so important to maintain a good credit history and rating is that when we do need to borrow, we will be able to do so more cheaply, because the rates and products we will qualify for will be superior and our costs of borrowing will therefore be lower.
Looking to reduce the costs of borrowing with personal effects loans, and borrowing in general for that matter, is the most important consideration when looking to structure the loan.
We should always be looking to get the best rate we can on the loan, and also pay it off as quickly as we are comfortable. In many cases, a line of credit will be the best choice here, as they almost always offer better rates than credit cards, with rates similar to loans, and they also offer the flexibility of paying down the borrowed money more aggressively.
One of the drawbacks of getting a loan instead is that, while we may be able to make extra payments, and should consider doing so as we can, this type of product does not allow us to take back any payments, and also does not allow more borrowing to be added to the loan if required.
Many people just have loans and credit cards, and they may be doing a good job paying off the loan, but those who borrow often have other borrowing needs come up, and these other needs need to be managed as well.
A line of credit will allow you the greater flexibility to add to the principal when needed, but this also can be a negative point, with those who do not have the discipline to refrain from borrowing too much.
On the other hand, those in this situation, who can’t control their borrowing, may just put these extra purchases on their credit cards if they have them. Even if they cut up all their cards and just have the loan, they may apply for new credit cards if the desire is strong enough, so not having the extra borrowing power that a line of credit offers may not be an advantage in these cases, if people will borrow anyway and pay much higher interest rates.
We should always think about whether any purchase is worth it to us, and especially if we’re looking to borrow to buy it. People borrow a lot of money with personal effects loans, and often times, the choices made tend not to be the wisest. Only if we think about these things enough can we be reasonably sure or even sure at all that we’re acting wisely.
John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.