Using credit in a crisis: a good idea or a bad move?
Even with a well-controlled budget, no one is immune to a financial blow. The loss of a job, a large unanticipated bill, a household appliance failing or even a major car breakdown are all imponderables that sometimes have to be faced.
While emergency savings are ideal for this kind of situation, we don’t all have the reserves needed to tackle the things life throws at us. That leaves us looking to credit as a way to plug the gap. But what are the advantages and disadvantages of this approach?
What sort of credit is available?
In the event of an unanticipated expense, consumer credit loans are a tempting way to pay a bill. These vary in size and may be lent by a bank or other financial institutions and businesses.
This could include:
- Credit to finance an item such as a car or a piece of furniture. The credit is usually offered by the seller and the sale is cancelled if the credit is refused.
- Loans that can be used as you see fit and are repaid over time.
- Payment facilities offered by supermarkets and other businesses.
Quick and easy solution
The main advantage of consumer credit lies in the quick availability of money that you can then repay little by little. This type of credit benefits from a legal framework that protects the consumer: in particular, you have a period of time to withdraw if you find another solution in the meantime.
Consumer credit is usually cheaper than an authorised bank overdraft, the cost of which can be exorbitant if it is not repaid very quickly. However, you should avoid putting yourself in an even more complicated situation of indebtedness by taking out a loan to cover your overdraft. If your debts are spiralling, seek financial advice and talk to your lender.
Finally, consumer credit is often redeemable early without penalty, giving you the flexibility to get out of debt as quickly as possible.
Hidden dangers
The decision of whether or not to grant credit is made by the lender and will depend on your solvency and ability to repay. While a loan or other credit gives temporary breathing space, it will have to be repaid in the medium or long term.
Depending on the type of credit chosen, the cost of borrowing can be particularly high. Consumer credit is the primary reason for household over-indebtedness. It also gives the illusion of being able to buy everything at any time.
It is important not to fall into this trap and to take the repayment terms into account, including the interest rate and the various fees that may apply. Ensure that you have enough to live on while making the monthly payments you agree.
When using credit, it makes sense to choose a single, specific loan for the shortest possible time while you get yourself back on track.
