How to Borrow Wisely
Life can be good if you have money. You can easily sort out issues related to your finance if money is at your disposal. But that is not always the case. There are times you need money to do some things and the only way you can get them is through borrowing.
Borrowing money for the right thing is good, but borrowing irresponsibly can be expensive in the long run. With irresponsible borrowing, your debt can easily spiral out of your control. So how can you do borrowing right?
1. Make Sure it Makes Sense
Don’t borrow because you feel like it. Borrowing money comes with costs so make sure that it’s the right choice for you. Make sense with your borrowing! Perhaps you’ve heard of ‘good debt’ and ‘bad debt.’
Good debt is used on things that gain value over time. For instance, borrowing to buy a home provides some long term benefits.
On the other hand, bad debts go into current consumption. For instance, borrowing to buy an expensive car which will depreciate within a few years does not make sense. If the reason behind your borrowing has no future benefits, then consider finding other ways to fund it.
2. Do the math
Price go hand in hand with value, be watchful to ensure you get the real value for anything you buy. Run some numbers between the purchase price and monthly payments associated with your decision.
If you have not worked it out, you may end up choosing an option that will leave you worse off than before. Always consider what you can comfortably afford. Running the numbers can be overwhelming, but the secret lies in the capability to predict the future.
You may still want to borrow again in the future, and your current payments may affect your eligibility. Only borrow within your level of comfort. You can also try to be conservative by not borrowing the full amount available.
3. Get the Right Loan
This is where many borrowers go wrong. Your loan should match your need! Don’t borrow a home equity loan to do business with. Remember you secure a home equity against the equity in your home! So in the event that the business fails and you don’t have any other means to pay off the loan, then you risk losing your home.
Any time you want to borrow money, think of borrowing unsecured loans first. They give you the advantage of not pledging any collateral leaving your lender with nothing to take out if you default the loan. If you default unsecured loans, your credit score will suffer and perhaps end up being summoned in court, but your home, car or any other property remain unaffected.
Also, loans that allow for monthly installments can be a good option. However, don’t take loans that are payable on a weekly or bi-weekly basis because they are often very expensive and can affect your credit and finances.