Life in the fast lane is the new norm. Ever more people – young people in particular – are taking on debt in order to keep up with our consumer society. The many available credit options make it easier than ever to live in the moment. But the party usually ends abruptly when it comes time to pay the fiddler.
Consumer loans, such as personal loans or bank loans, do not come free. In fact, they don’t even come cheap. That makes living on credit an expensive habit.
Example: A 20,000-franc loan with a 12-month loan term and an effective annual interest rate of 10 percent will cost you 1052 francs. That means you will need to set aside 21,052 francs to repay the debt.
Longer loan terms are even more expensive. The same loan, but with a 24-month loan term, will cost you nearly twice as much – approximately 2054 francs.
The lesson: Unless a loan is an absolute must (a mortgage, for example), you should try to avoid loans like the plague. Most of all, avoid taking out new loans to repay your existing loans, as doing so can easily send you into a debt cycle.
If, after much careful thought, you decide that you are willing to consider getting a loan, stick with loans that have a short term (within the limits of how quickly you can afford to repay the debt). Short-term loans are always cheaper than long-term loans.
Make sure to compare lenders and loan instruments, because annual interest rates vary between offers and can be as low as 4.5 percent or as high as 10 percent (the current legal maximum for loans). Choosing the right loan provider can save you hundreds of francs, or even thousands in the case of large loans.
The moneyland.ch team
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