The main rule associated with financial literacy is the need to create financial reserves. This means that money earned in employment or business should not be spent in the last crown. It is necessary to set aside some of the wage. This is subsequently referred to as the financial reserve. But many people do not follow this path. And there are those who choose a loan as a financial reserve option. We will look at this topic and evaluate what the loan as a financial reserve has the positive and negative. scotsbeavers.org has more information
The choice is great
If we stick to the statement that a loan can actually serve as a financial reserve, it must be said that the main positive is certainly the offer of options that exist in this respect. Both in the banking and non-banking segments. Each candidate has a choice of dozens of options, which they specifically choose. Together we will look primarily at the individual categories of given loans, which can be seen as a possibility of financial reserve. These are:
- Overdraft – authorized bank account overdraft
- Credit card – bank and non-bank
- Virtual credit – pre-approved, intended for immediate sending to the account
Interest rates tend to be higher
It is important to say that loans, which serve as a financial reserve, are a specific category, which is related to the fact that their interest rates are usually higher than in the case of conventional, most often consumer loans. When you take out a loan that will be paid to you in a certain amount immediately, that is, at once, there is nothing extraordinary to earn on interest in percent units. Speaking of the creation of financial reserves, it is not uncommon for interest values to reach tens of percent.
You only use money when you need it
Let us not forget one more comparison with a classic consumer loan. As mentioned, you apply for it, and in a few days it is paid in full, ie the total amount required. By contrast, a loan has a significant advantage as a financial reserve. After the initial creditworthiness review, it will be approved and also prepared. It is a pre-approved financial framework from which a specific person can draw not only at any time, but also in the required amount. Furthermore, it should not be forgotten that it does not go through another round of creditworthiness testing, as everything was settled from the very beginning.
Obligations must be repaid
Whoever creates a financial reserve from his savings can not only use it at any time and for anything, but he also has the certainty that the spending does not result in any obligations. He spends the money and is at zero. As regards loans, it is to be assumed that these are liabilities that have to be repaid. The downside is the fact that in the future the person has to pay money to the creditor’s account in order to settle the debt. However, this is also related to the issue of minimum monthly payments. This means that the obligation is not just to be repaid, but to be paid regularly.
Interesting benefits can also be obtained
It is also a positive fact that some financial products can offer interesting benefits that may point to the fact that a loan as a financial reserve may be more profitable than it seems. Usually this is not the case of overdraft, nor of various virtual cards and pre-approved limits. The particular product that can bring concrete benefits is definitely a credit card. What can it be associated with?
- With an interest-free period
- With zero management fee
- With cashback system
- With discounts at dealers
Risk of spending foreign money
If a person has good financial literacy and takes the services as something they really use in an emergency, there is nothing wrong with them. But it must be said that there are quite a few such people. Most people begin to tempt the loans to draw on them slowly. And not because of financial distress, but simply because they want to buy something extra. At that moment they are already spending foreign money without it being necessary. They find themselves in a situation where they often create unnecessary financial obligations as well as unnecessarily burden their future budget with considerable interest rates.
Interest is paid only on the amount spent
Interest is quite high. This has already been mentioned. However, we will return to them again. The advantage of reserve loans is that the interest rate is not charged on the whole pre-approved amount. It is charged only from the amount that is actually depleted. This is a rather interesting positive.
Charges may also be a risk
It is not unusual that fees also appear in connection with these loans. They are simply charged so that the bank or non-banking company earns something even when the loan is not drawn. To look at what charges are quite common, these are:
- Fee for approval and delivery of money
- Management fee
- Regular renewal annual fee
The available amounts are quite high
We conclude our list of advantages and disadvantages with one positive. What is it specifically about? The fact that a loan in the form of a financial reserve need not be too small. It does not have to be only thousands or less tens of thousands. These may be, for example, hundreds of thousands of sums, which are by no means exceptional in the case of overdrafts or credit card limits. However, it should be added that the availability of large amounts is not automatic. As with any other loan, the creditworthiness of the applicant is also considered here. A simple direct proportion applies – the higher the salary, the higher the limit can be approved.