Whether they’re for a new refrigerator, broken laptop or car repair, some expenses can creep up on us without warning. And even if we know they're coming, we may not have the means to fund them immediately. Knowing when to turn to credit is vital to avoid needlessly going into debt. 

Households and SMEs often use credit to finance expense or investment needs. When applying for credit, we must consider the repayment term, interest rate, fees and instalment amounts.

The most popular products include credit cards, personal loans and mortgages. Because they serve different purposes, we should know which to use and when. That way, we’ll know if we should take the plunge. Here are some points to consider:

• Financing needs. Because financial bias can lead us to make poor decisions, we must first ask ourselves if we really need to finance a purchase. Paying small, regular “ant expenses” with a credit card or giving in to impulse due to the ease of credit can lead to indebtedness, with interest that makes us pay over the odds for a product or service we would've otherwise bought on the spot with our own money.
  
  
• Cash flow. Cash flow means money that's available when we need it. When purchasing something expensive, we should consider if we'd be able to cover any unforeseen expenses. Otherwise, financing all or a portion of the purchase could be the best way to go, as long as we understand the repayment term, interest, instalment amount and other factors.
  
  
• Indebtedness. Financing is a future obligation that we must make sure we can meet. Can I keep up with repayments? Do I have other debts? Will it affect my savings? These questions will help us assess the impact on our accounts and avoid over-indebtedness. To find out your borrowing capacity, check out this article (in Spanish) on Santander Consumer España’s blog, Tu Futuro Próximo (“Your near future”).     
  
  
• Financial goals. In addition to affording us convenient payment plans, financing can also help us make investments when we don’t have the means to do so immediately. Mortgages, which enable us to pay for a purchased property over a long period, are the most common form. SMEs use financing to acquire machinery or supplies that will boost production.

To finance or not to finance

If you’re having doubts over financing a purchase of low-medium value, ask yourself this: Is the loan term greater than the lifespan of a product or service we want to buy? If so, it’s probably best to steer clear.

Imagine financing a three-month subscription to an online platform over six months. At the time the subscription ends, you’ll have only repaid half the debt. You would then be paying for something you’re no longer using. It’s better to save up for such purchases to avoid unnecessary debt and stay in fine financial health.

Whichever financing product we use, we must read the terms and conditions and make sure the lender is trustworthy.