Loan, credit, and pawn. Same purpose, different concept

Every beginning of the year is a symbol of good wishes, promises, and projects; however, as a result of the lack of planning in the use of the Christmas bonus, situations of over-indebtedness are faced that have repercussions on spending and, therefore, on the quality of life. Faced with this situation, some people resort to loans or financing to obtain money quickly. In this article, you will find out what to consider in each option.

Scarce resources vs. infinite desires

Can't make ends meet? In January, the biggest financial imbalances are generated in families. The reasons for this are the disbursements made in December. In addition to this, you must add the expenses, needs, and immediate desires and those that will arise in the coming months. If you have a negative balance and are considering resorting to financing, you can resort to an informal loan, a personal credit or pawn a valuable pledge. Each of these options has different characteristics. Here is a description of each of them.

Although no matter how pressing your economic situation may be, you should consider the advantages and disadvantages of the different financing options. The idea is that with the option you choose, you maximize the benefits and minimize the costs. Analyze the choices available to you. Don't go for the most practical or what you have at hand; you can lose money and above all your peace of mind.

Informal loan

Are you planning to borrow from a family member or friend? This is one of the most difficult loans because of the personal relationship that binds you, a situation that does not happen with financial institutions. Be clear that it is a favor. Even if it is your relative, you must understand that he/she is giving up this money for some time and is assuming the risk that the money will not be returned, because of the relationship or friendship that unites you.

You have the great advantage that, on most occasions, the credit is free of commissions and interests; however, you must assume that this transaction does not have the security that the money will be returned, so you must be compliant. But not everything is so informal or in good faith, some people establish formal conditions when making a loan, either through a promissory note, contract, or a monthly interest rate. Everything must be done by the will of both parties.

So for a loan of $10,000 you can end up paying in one year up to $12,000 of pure interest if we consider a monthly rate of up to 10% on the amount borrowed.

Personal loans

This option can only be acquired by people who have a formal job (in the case of a payroll loan) or a property that they provide as collateral (in the case of a personal loan). Using the simulator for a $10,000 loan with a 12-month term, the lowest annual interest rate is 16.0% and the highest is 42%. Hence the importance of comparing at least three options and not getting carried away by what is at hand.

Before accepting the loan, perform a search in the Registry of Financial Service Providers, since financial institutions or entities that are part of the financial market must be included to be identified by users before contracting. You may also consult the Register of Supervised Entities of the National Banking and Securities Commission.

Pawnshops

When choosing a pawnshop, the key is to look for the one that will give you the most money for your clothes (a higher percentage of the appraisal) at a lower cost (lower interest rate). Pawnshops lend an amount of cash on the value of a garment, which you get back by paying the borrowed money plus the cost of the loan within an agreed period. If you default on the payment or do not renew your loan, the pawned item is put up for sale.

You can pawn jewelry, watches, furniture, appliances, coins, computers, fine pens, tools, motorcycles, etc.

An exercise using a pawnshop simulator to determine the amount of the loan for a $20,000 watch to be paid in five months. According to the result, the loan amount was 50% less than the value of the good, i.e. $10,000. Consider that the loan will depend on the real value of the good, as well as the conditions and characteristics determined by the appraisers.

Pawnshops must show in the contract the annual interest rate, payment term, and deadline for renewal or performance. The contract must be registered with the Federal Consumer Protection Agency, following the law regarding the commercial information requirements that the contract you will receive must contain.

To check if a pawnshop has registered its contract with the Federal Consumer Protection Agency, you can consult the Commercial Bureau in the option of adhesion contracts and with the name of the establishment or contract number check if they are registered. When using a pawnshop, you must evaluate your real capacity to recover the garment and the value it has for you and your family. In some cases, you can even pawn cars, but if you do not recover it in time, the loss of your patrimony can be huge.

Now is the time to learn

This is the perfect time to reflect and learn from your own or other people's experiences. Many people, at least once, have had to face a financial crisis, either because of unemployment or health problems or simply because they overspent or lost control of their debts. A basic financial rule is that the payment of your debts should not exceed 30% of your net income, otherwise you could fall into insolvency.

If you are in debt, do not despair, getting out of debt is not easy, but with discipline and planning, you can always recover your financial stability. The most important thing is to recognize that you are in debt and not wait for your accounts to be sent to a collection agency. Besides, being in debt is not always bad, although it sounds strange, there is also good debt and it is the one that you use to increase your assets, for example: buying a house, remodeling your home (which gives it more value), buying a car, etc.

There is no universal plan to get out of debt, the strategy to follow must be according to your particular situation, however, consider the following:

Before asking for a loan you must be very clear about whether you will be able to pay it or not. Do not ask for money if you are not sure you can afford the debts. And do not ask for more than you need.
Remember, a loan is never extra money. It is a loan provided by some institution or person, which is a determined period you will have to pay back.
The best credit or financing for you will depend on your needs and your history.
Have the payment plan that you will carry out on hand or in a visible place.
Paying on time will help your credit history not to be damaged and this way you will be able to continue having access to different financial resources.
You must put your finances in order; a budget will help you achieve this.