More and more, I hear from my readers that they feel they are over-indebted and that the debt burden does not allow them to spend their monthly earned money on things that are needed today, because money has to be returned to creditors for what was bought in the past. Well, then, what is the amount of credit that is good and what are bad loans?
Amount of credits
Let’s start by trying to find out how much credit should be accepted so you can determine if your debts are too big or not. Generally accepted standards that set the amount of credit to be either a one-year income or a monthly loan payment should not exceed 20% of your income. As long-term loans are often large enough, and if the average Latvian wage is only 500 Euro, then his total credit commitment should not exceed 6000 Euro, which is the amount of salary once for twelve (500 * 12). After this calculation, if you have a salary of, for example, 1000 Euro, which is already considered a good salary in Latvia, then your total loan volume should not exceed 12 thousand Euro.
But as real estate and car prices are quite high, most people have already breached this barrier. And then the second barrier is applied, which means that your total monthly loan payments should not exceed 20% of your income. This means that if you have a salary of 500 Euros, your credit payments should not exceed 100Euro per month, but if your salary is 1000 Euro, then this payment should not be given 200 Euro. And these 20% must cover the repayment of both the principal and the credit. After that, you can easily determine if your total credit is more than 12 months’ salary and the minimum credit payments exceed 20% of your monthly income then your debt is definitely too high. And according to these criteria, I know many people whose total debt is certainly too high, which in turn means that they should start paying their debts more seriously than they did so far!
Good against bad credit
Many people in the financial industry say that there are good and bad credits, where good debts include long-term debts like a mortgage or a car loan, but bad loans include short-term credits that are quick loans and a credit line.
And it is often seen that financial experts are arguing about whether there are such good and bad loans or whether all the credits are bad. And I am one of those people who think that all the debt is bad and I think that short-term loans are perhaps even better, because even though their interest rates are higher, people pay off more quickly, but for long-term loans consumers are attracted to several years and often even decades, certainly not good either for their wallet size or nerves. But, as they say, getting used to everything, and when a person is accustomed to being in debt, he will borrow more and more.
We are all accustomed to paying minimum monthly payments on credit and consider this to be the best practice, but in fact, the minimum payments are designed to bring as much profit as possible to the credit institution itself, but consumers who really want to get out of credit should to spend as much money as possible on this credit repayment every month to get rid of these debts as soon as possible. The credit should be, as an extraordinary option, if there is really no way to find additional funds to pay for, for example, heating or buying food, but it should in no way be self-evident and even assumed that credit should be taken to buy something!