With money at hand, you can provide solutions to a wide range of life issues. But sometimes, the required cash to do what you want may not be readily available. So, what do you do? Borrow money – but borrow money without ruining your finances.
Borrowing money should be geared towards things that will make your life better in the long term and not just solving immediate needs. Money can provide solutions to problems, but if you do not channel the use of money – especially borrowed money – properly, you’ll owe so much and your debts will get out of control. So, how can you borrow money without running your finances? Here are ways to do that.
1. Track out the figures on your income and expenses
It is important that you put the figure into consideration for anything you are getting. For instance, you may come across salesmen when shopping for a car who would place high attention on your monthly payment instead of the actual price of purchasing the car.
The terms of your loan and monthly payments are very important but consider your income and expenses to see how much you’ll struggle less with when paying for the new loan. If it looks like you’ll have a hard time paying back your new loan, then pick a less expensive option instead. Alternatively, you could make a huge down payment to make it less tensed by sorting the loans. Run some figures to see how much you’ll be paying. You may want to consider online loan calculators, computers, or just do it manually.
2. Go for the right loan
Tie your needs to your loan. This may be less or more automatic in certain circumstances. So, if you are buying a home, it is likely that you’ll qualify for home loans only – with like 15 or 30-year fixed-rate mortgages. But then, you’ll find mismatches easily too.
For instance, using a line of credit for home equity for financing a business may be dicey – we never can tell too, it could pay off. Peradventure, if the business flops, just as a huge number do, you’ll lose your home if you do not have other ways to sort the loan.
Unsecured personal loans may be a better alternative to consider. You may suffer bad credit if you default on your loan, which may attract some legal actions against you, but then, you will not suddenly become homeless or lose your car as a result.
Installment loans that you pay off every month are generally considered the best option. The ones you pay weekly or once at the month end are often very expensive. Borrowers who take these loans are usually stuck in desperate situations and may turn into big mistakes.
3. Ensure borrowing is the absolute best thing to do
Borrowing has both good and bad sides. Good debt offers solutions to things that will provide you with value in the long run, and possibly add more value over time. But bad debt meets urgent needs without offering value in the long term.
Bad debt may help you meet immediate consumption, acquire assets that do not add value, and depreciate over time such as fast cars, or investments that may not be able to meet up the loans and their principal and may lose their full value over time, or risky assets.
You may have gotten bad debt if the expenses were used to buy an expensive car. This is because it will continue to depreciate in value and may end up throwing you into bigger amounts in debt. Also, if you are paying bills such as phone, feeding, cable, or entertainment, you are very likely going to have it ugly since there is no way to keep getting loans to cover the expenses.
Good debt includes acquiring an affordable home, especially because of its long-term benefits to your finances, and having a college degree, especially because of the widened opportunities it provides to you over a lifetime.
Check out the length and cost of the prospective loan before getting it. Consider the interest and principal and compare to how long the benefits will last and the amounts it may increase or decrease. To borrow money without ruining your finances, you must ensure that the loan is projected towards investing in your future. Otherwise, consider other approaches to meeting the need.
Smart tips to get out of your debts
- Be timely with your payments
You’ll need a whole lot of financial discipline to meet up with paying your debts in time. Aside from the fact that this helps you reduce your debts through the loan tenure, it also helps you stay secure from penalties that may be in place which could also attract extra charges.
- Keep an accurate record of your debts
It is important to take stock of all the debts you owe. This will help you address them properly. Create a list of the various debts with their tenures, EMIs, and interest rates to determine which one should be given urgent attention and the costliest.
- Keep off extra loans
When you find yourself already saturated with huge debts, it is crucial to avoid adding more to it. All your payments should not exceed 40% of your income. If it exceeds, your finances will be in trouble, and you may even run into a real hard time if you lose your income for any reason.
- Give the costliest of the debts utmost attention
After taking a record of your debts, address the costliest first. The costliest is, for instance, the ones that attract the biggest interest rates if you keep them pending. High-interest loan rates can ruin your finances.
For instance, home loans can attract between 8% – 9% interest, and personal loans may not exceed 12%. Credit card loans may run up to like 40% interest rate yearly. That’s huge! But payday loans may even shock you more with a 1% rate per day or beyond 365% per year! So, consider the costliest loans first since they attract the highest charges.
- Do you already have too many loans? Then, try consolidating them!
If the loans you have accumulated are already hard for you to keep track of, then consolidating them into one loan with just one EMI should be considered.
Home loans, personal loans, and credit cards can make this possible, and give you just one loan to keep track of. Consolidating the loans may leave you with a reduced interest rate. For instance, instead of paying 37% on your credit card debt, you could migrate to a personal loan with just 15%.
- Track your budget to fit into a repayment plan
An important method of managing your debt is keeping a monthly budget. Track your income, expenses, and savings. You’ll be able to devise various means of lowering your expenses and impact positively on your debt.
- Secure yourself from income and economic surprises
Situations, where your finances or income isn’t capable of keeping up with your kind of lifestyle, are economic shocks. For instance, if you lose your job, it would impact badly on your income, and may also make it difficult for you to keep up with a specific lifestyle.
It is safe to have sufficient liquidity for all situations. Create a fund that may be about 3 to 6 times bigger than your current income and can sustain you in emergency situations. Lock it up in a liquid mutual fund or fixed deposit.
- Stay safe from damages, diseases, disability, and death
No one wishes for bad events, but it is rather better to insure yourself and your family from the hard effects. A loan protection policy or term insurance policy will secure you and your family from unforeseen events such as untimely disability, hospitalization, or death.