Dreams can become a reality, whether it’s a house by the sea, the latest car, or a trip around the world. While purchasing a home, a house or a car, we are frequently short of money and so we borrow money from the bank, family, friends or loan providers. A loan or a bank loan is one that you are obligated to repay with interest. Having this debt comes with its own set of risks.

What are the causes of debt risk?

You may be at risk for debt due to any of the following reasons –

• Bad debt

Good debt is one that has a low interest rate and imposes minimal penalties for missing installments. Bad debt is the opposite. You can get into bad debt through personal loans, credit card loans, or loans from loan sharks.

• Add up many loans

Excessive borrowing will leave you with a large monthly payment to make, and if you do not have enough money to cover it, you may end up borrowing more. This is a vicious circle of debt that can land you in a financial bind in the end.

• Obtaining a loan without checking

Borrowing without reading the terms and conditions, such as the interest rate, finance charges, penalties, duration of the loan, etc. You might be surprised at how much interest you end up having to pay and how much finance charges you have to pay.

• Resulting in a low credit score

An excessive number of loans and late payments can lead to a poor credit rating. Credit scores are now a benchmark to assess you when you purchase real estate, apply for a credit card, or open a bank account.

How to handle these risks?

If you are in debt or credit risk, your financial life can spiral downward. Get out of a financial bind instead of getting into one and then trying to fix it.

• Don’t take a loan from a bank or financer without thinking it through carefully. You will find hidden charges if you read the terms and conditions carefully. Don’t be fooled by low interest rates.
• A good loan, such as a housing loan, education loan, or business loan, can add value to your financial position. Do not take on bad debt like credit cards, personal loans or car loans.
• Repay any existing loans, especially bad debt, as soon as possible. It doesn’t make sense to keep it until it runs out, if you have the funds, repay it immediately.
• A good solution is to plan for your wants, to save for them and avoid taking out loans. When you plan your financial life, be sure to list out your goals, needs and wants. Maintain an updated financial plan at regular intervals to stay on top of any changes. The key to managing your finances well into your golden years is to create a robust financial plan.

Every corner of your life will present a risk; some of them you can handle, and some you simply cannot as life is unpredictable. For those situations where you can anticipate them but are still unprepared, this is foolishness. In a world full of uncertainty, you certainly don’t want to add to your worries. If possible, seek advice from an expert, and be prepared with armour to deal with when life throws you a few unanticipated bullets.