It is never wise to bite more than what you can chew. Though this old proverb has turned into one of the biggest clichés, these words still retained their value in various situations. Applying for loans is probably the timeliest case in point.
True enough, first time borrowers often succumb to the thrill of acquiring instant cash from banks or lenders. The adrenaline spawned by the itch to purchase from large sum of moolah is enough to cloud their judgment in contemplating whether or not they have enough to pay for what they owed.
The frequency of these instances does not justify this mistake. The fact that everyone seems to be allowing their selves to be burdened with credits that they cannot manage, doesn’t make it okay. In this time of unfriendly economy, it is best to be keen on your financial stability.
As such, it is imperative to gauge your purchasing power prior to getting loans.
What is purchasing power?
Purchasing power refers to your ability to fund both basic necessities and whims. In an economic sense, this defines your monetary limitations when it comes to buying certain items.
In a simpler sense, purchasing power is the amount of money you can shell out from your profits.
Having a clear view of this facet is vital in getting loans. For one, it is a strong determinant of your means in paying monthly dues together with your existing bills.
So how does one define his purchasing power?
Economists tout a special formula for this. All you need to do is to look at your gross monthly income and pinpoint the amount of cash you spend and save. If most of your salary is earmarked to paying household service dues, amortization, and other credits, then you have poor purchasing power: meaning, you barely have enough to buy other things.
On the other hand, greater leeway of budget translates to greater purchasing power. It is only in this instance that you can have enough confidence in pursuing a loan.
Why is it important to consider purchasing power prior to getting loans?
The answer here is pretty obvious: How can you manage to pay for the money you owe when you barely have enough to buy groceries?
At this point, it is probably clear that you have to be endowed with enough budget to pay for credits without having your lifestyle greatly affected. Higher purchasing power means that you have more than what you need, thereby guaranteeing that you can keep up with the dues.
But the most basic reason for coming up with an idea on your purchasing power is for you to have a heads up on whether your loan application will be approved. Note that lenders and banks are now stricter in accepting borrowers, thus, their intense investigation on the financial means of applicants.
Going through the whole process without being sharp on your qualifications can leave you with undue stress and frustration.
And should your application be accepted, you might end up being buried with more loans and credits…simply by biting more than what you can chew.
Discover interesting historical account of money and its purchasing power from The Purchasing Power Of Money: Its Determination And Relation To Credit Interest And Crises by Irving Fisher.