Financial Education
What are the risks and opportunities associated with taking a loan?
What are the possibilities of taking a loan?
Borrowing provides you with the flexibility to access financial resources when you require them and repay the borrowed amount over a period of time. It enables you to fulfill your needs and desires, whether it's purchasing necessary items, funding your education, starting or expanding your business, or enhancing your overall quality of life. However, borrowing should be approached with great responsibility. It is crucial to carefully evaluate your desires and financial capabilities before taking on a loan, ensuring that you do not undertake an obligation that you cannot repay and that would become a significant burden for you.
What are the risks associated with taking a loan?
If you make the decision to take out a loan, it is crucial to consider certain significant risks associated with borrowing in advance. One of the most important risks is the possibility of being unable to repay the loan amount according to the agreed schedule. This situation can arise due to various reasons, such as:
Loss or reduction of income: If you experience a decrease in your income, making it difficult for you to meet your loan obligations.Increased expenses: This includes both unexpected and planned expenses. Unexpected expenses refer to unforeseen circumstances that were not accounted for at the time of taking the loan and therefore not covered by insurance. For example, costs associated with repairing a broken-down car or restoring a house damaged in a fire.
It is also important to consider the risk associated with fluctuations in currency exchange rates. If you receive income in Georgian Lari (GEL) but have taken out a loan in a foreign currency, you will be required to repay the loan in that foreign currency. If the exchange rate of the foreign currency increases relative to the GEL, you will need to pay a larger amount of GEL to acquire the necessary foreign currency for loan repayment, which can have a negative impact on your financial situation. To mitigate this risk, it is advisable to borrow in the currency in which you receive your income. In order to minimize and balance this risk, the Civil Code of Georgia stipulates, that loans up to 200,000 GEL can only be granted in GEL.
What do borrowers often fail to consider?
Before taking a loan, it is crucial to conduct a thorough assessment of your financial capability to determine how much you can borrow and comfortably repay. This assessment should take into account your income, expenses, and existing obligations to ensure that your basic needs and those of your family members can still be met. To accomplish this, you need to analyze your personal and family income, as well as your expenses. By calculating the amount of money left after covering all essential expenses, you can determine whether this remaining amount aligns with the planned schedule to fulfill the periodic loan repayments throughout the contract's term.