The beginnings of each year have never been easy and 2023 is no exception to this rule. The hangover that the Christmas celebrations left millions of people and the end of a year of good growth began to collide very early with the first symptoms of the much-announced new year economic slowdownthe sharp increase in the cost of bank credit, not to mention that of the drip and, for those who were not cautious in 2022 and spent with full hands, with the expenses of the start of the school season, 13.12 percent more expensive than that of the previous period.
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Undoubtedly, the situation today is much more complex than a year ago, especially if the option to face the beginning of the year is to go into debt. And it is not for less, unless you require bank resources to start a business, for which you can find rates between 18 and 20 percent effective per year on average, that are not so low, take credit to finance your basic expenses or attend to some contingencies of the moment, you will have to prepare to pay, on average, 14.5 percentage points more for a consumer loan than a year ago.
According to records of the Bank of the Republic, the average rate at which financial institutions are lending until the end of the second week of January was 31.79 percent effective per year, while a year ago it was 17.27 percent. But be careful, these averages do not include paying what you will have to pay if you are thinking of using your credit card to meet those needs or the recent adjustment in the market reference rates that the Issuer has just made and that took until 12 .75 percent, which will make the cost of credit in Colombia even more expensive.
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In the credit cards for natural personss, according to the most recent information from the Financial Superintendence, the average rate is close to 28 percent effective per year, but this does not include cash advances, for which the average interest currently applied is 34.4 percent. cent cash per year.
However, when taking out a loan, you should take into account that the interest rate that the bank will use depends on your credit rating, which measures your level of payment risk, the term at which you will take the loan, and the amount , of course.
Prepay, refinance or sell
According to the most recent ‘Consumer Pulse’, prepared by the risk center transunion, three in 10 respondents showed that their household income had decreased, four percentage points more than in the third quarter of 2022. In addition, 36 percent of consumers believed that the economic situation of their household was worse than expected, compared to 28 percent in the previous quarter.
The same report also noted that 32 percent of consumers said they would not be able to pay at least one of their current obligations in full, four percentage points more than in the third quarter of 2022, while 27 percent expect to pay at less a partial amount. Another 26 percent plan to refinance or renegotiate their current payments/rates.
Under these circumstances, personal finance experts and market authorities themselves are recommending not taking on new debt this year unless strictly necessary, due to high interest rates and the slowdown in the economy, which may affect employment.
Before going for a new loan, experts recommend making an evaluation of the level of indebtedness that you have, as well as the available income. There are three alternatives that also deserve a detailed study to make the best possible decision that will allow you to face a year that does not look entirely healthy from an economic point of view: prepay the debts you have, refinance them or sell them to another entity than offer a conditions of rates, terms and payments that can improve your cash flow.
Remember that the last option, if you already have financial obligations, is to take out new loans that can complicate your economic situation and household finances.
Héctor Juliao, Managing Director of Corporate Banking at Credicorp Capitalpoints out that in times of crisis it is often believed that it is best to pay off debts so as not to have to dispose of money every month that, in theory, can be used to meet other obligations.
«The first thing that must be taken into account when making this type of decision is to review the current characteristics of the credits that you have, so that you can analyze with high can stay, high to renegotiate and high it is better to settle in a way anticipated «.
He points out that it is important to review the conditions of the credits, mainly, the rates at which they were agreed, to know which ones are tied to higher rates, if they are fixed or variable rates, because in a situation like the current one of inflation and rise, that factor is key.
Prepaying is not always the best alternative, says the expert, because many times such a decision can leave you without resources to continue meeting other obligations, which is why it is necessary to evaluate all these elements.
If the alternative is refinancereview in detail the new conditions in which this agreement is agreed with the entity, since the important thing is to achieve benefits in terms of the cost of credit (rate) that will allow you to improve your cash flow.
And if the alternative is to sell the portfolio to another entity, it is also necessary that it be under conditions of interest rates and terms that allow you to obtain a break in your monthly finances to face a situation in which there is less income in the home as a result of of the economic slowdown. For this, it is best to consult several market entities until you find the ones that offer better conditions.
Zero advances with cards
David Nieto Martínez, director of the Finance program at Universidad El BosqueHe points out that one of the most effective recommendations in periods of crisis is for people to control their expenses and think carefully about whether it is necessary to acquire new debts.
Saving now and buying later will always be better than borrowing for the same purpose, some personal finance experts agree. «There are different options that allow people to save and take control of their expenses. The most important thing is that they get into the habit of doing this exercise daily and thus better understand their personal finances and correct what they are doing wrong. Additionally, It is important that we understand that being free of debt will allow us to make investments to increase our patrimony”, assured Nieto Martínez.
In this sense, it points out that it should prioritize obligations. Models such as ‘the snowball’ propose that the smallest obligations must be covered in order to start generating greater cash flow and pay the largest ones, this will allow them to be paid in less time and save money on the payment of interests.
It is also advisable to make a list of all the economic pending that will be had, in order to avoid over-indebtedness that later it will not be possible to cover, create a budget in which priority is given to needs, such as food, housing, services, among others, so as not to incur necessary expenses.
And the golden rule will be to avoid cash advances with credit cards and less if the resources requested with this mechanism are used to pay other debts since additional costs will be assumed, which leads to the initial indebtedness rising due to the high costs that banks apply to this type of debt.
