How To Be A Savvy Borrower
Borrowing money is a serious matter. Any time you take on new credit (or debt) you are legally liable to repay the loan according to the terms of your contract. Whether you are buying a home or car, taking out a student loan, or just using a credit card to make purchases, each piece of new debt adds to your financial burden and increases the amount of time it will take to become debt-free.
However, at some point in everyone's life the need to borrow money will probably arise. The average American consumer now has nearly $15,500 in credit card debt, per household. In addition, many people also have mortgage payments, car loans, and other types of credit which they must repay each month. It's easy to see why so many individuals quickly become overwhelmed with debt.
The key to borrowing responsibly is to know your true financial situation and honestly determine whether you can handle more debt. Not all debt is bad. If you make timely payments and fully repay your loan, your credit score and credit rating can actually improve. Having a higher credit score generally means that you will get lower interest rates and better overall loan terms when you do apply for new credit. This can result in significant savings to you over the life of your loan.
Factors to Consider Before Taking on New Debt
Experts seem to agree that there really are two types of debt- good debt and bad debt. Good debt is generally considered something you buy which will increase in value, such as a house. Bad debt is when you use credit to purchase things which have no real value (just about everything you spend to maintain your consumer-driven lifestyle).Before you decide to take on more debt (either good or bad) here are some questions you should ask yourself.
- What if I'm suddenly earning half of my current pay? Unfortunately, the job market has been volatile for the past few years and there is no indication that it will greatly improve any time soon. When you are considering adding to your debt load, it's smart to think about the worst case scenario. What if you lose your job? What if your hours (and income) are greatly reduced? If taking on this new credit means falling off a cliff financially if something unexpected happens, it's better to walk away.
- What is the real cost of the new debt? You have to factor in not only the actual cost of the item you are purchasing but also the interest charges you will pay over time. Using current interest rates, a personal loan of $10,000 paid over ten years will end up costing you about $17,000. A 30-year, $300,000 mortgage will cost around $750,000 in total. You should think about what you could do financially with that extra money that you're spending on interest payments. Always explore your alternatives.
- Am I getting the best rate? No matter what type of new debt you are considering, always shop around for the absolute best rate.
- Do I really need this? Any time you are dealing with spending habits, it is important to know the difference between "want" and "need". A lot of people have trouble with this concept- they consider everything a "need". Could you save up for this purchase and not have to use credit? It's always better to pay with cash and avoid all the interest charges.
- Is this truly a good deal? Many retail outlets offer "in-store" financing. While it may be quick and easy to get this new credit, it is not always the best deal financially. Shop around and compare prices and deals.
- How long will it take to repay this debt? Unless your income has increased, taking on new debt means putting money towards a new payment. This usually entails cutting expenses somewhere else in your budget. Is it worth it? A good rule of thumb is that for every dollar you don't spend on interest now will turn into two dollars to spend later.
Being a responsible borrower requires a high level of financial discipline and a strong commitment on your part to meet the obligations to which you have agreed. Meeting these financial responsibilities is an important step in successfully becoming debt-free and financially secure.
No one wants to be saddled with overwhelming debt. The stress and burden of always having to borrow money can be debilitating in so many ways- physically, mentally and emotionally. Don't let money control your actions. By consciously controlling your spending and saving wisely you can insure that you will reach your long-term goal of financial freedom. You just have to start.