Borrowing money seems to be a practice that we will never stop doing. We know how it almost drowned the average household during the Great Recession. A lot of us have yet to recover fully from what happened. But even if we know that our financial condition is still not as strong as before, we still continue to borrow money because that is how some us can afford to improve our lives. While this can be effective, it has to be approached carefully.
The consumer debt problem of Americans, regardless of what you hear on the news, is far from over. The debt is still as present as ever. In fact, some families may be having difficulties coping with all their debts. If another financial crisis that is similar to the Great Recession happened once more, a lot of households might not be able to recover. It is a scary thought.
According to the data collected in NerdWallet, Americans have a total of $11.83 trillion in debt. This is higher than last year by 1.7%. The average mortgage owed per household is $156,333. Student loans are currently at $32,953 while credit card debt is at $15,706 per household. This is a huge load for the average household to carry.
Sure, the highest debt that consumers owe is a home loan – something that is actually helping them increase their personal net worth. But it is still a dangerous debt to have. You need to know the right practices when it comes to borrowing money so you will never have to endanger your financial condition again.
The truth is, debt is not the problem in society. It is how we react to debt that makes it a good or a bad debt. If you know how to manage your credit properly, you do not have to fear that it can ruin you financially.
What to do when you want to borrow money
The key to borrowing money is to do it wisely. Here are 5 things that you need to do in order to be wise with debt.
Do have the right reasons to borrow.
You need to have a valid reason for going into debt. Credit is something that you need to pay back with interest. You want to make that interest worth your while. Having the right reason to be in debt is how you can do that. It is something that you need to think about carefully. If you will borrow money to get the latest gadget even if you do not really need it, you know it is not a good reason to be in debt. But if you will go into debt because you want to put more money into your pocket, that is a better reason. For instance, if you will use credit to upgrade your oven so you can earn extra from baking cookies, it is a great reason to be in debt. If you do it correctly, you might just be able to earn enough so it pays for itself.
Do find the best interest rate.
A big mistake is borrowing money without shopping for the best interest rate. There are a lot of lenders out there. You need to know which of them offers the best rate so you can minimize the amount that you need to pay on the interest. The lower the rate, the better it will be for you. Thanks to the digital age, it is easier to know the existing rates in the financial market. You can visit websites like Bankrate to compare rates.
Do check if you can afford the payments.
Borrowing any amount of money is not something that you do on a whim. It is a financial decision that you need to think about carefully. One of your considerations should be how you will pay off the loan. If you are unsure how you will pay off the loan, then do not proceed. At least, put it on hold until you are sure that you know how you can afford to pay back what you will borrow.
Do understand the fine print.
Nobody reads the fine print. Really. The small prints are boring and some of the words are hard to understand. While that is unfortunate, you need to read the fine print. There is no shortcut about it. Actually, you need to do more than just read it. You need to understand it. If there is something that you do not understand, ask. You might be signing up for something that you are not ready to deal with.
Do save while paying off debt.
Lastly, you need to keep on saving even when you are in debt. So if you are revising your budget so you can accommodate your new debt, make sure you leave room for savings. We all know what having an emergency fund will help eliminate the need for unnecessary debt. Using credit to buy something that will improve your financial situation is a good idea but it is a better idea to buy it in cash. That way, the return of that investment is greater. So always leave room for savings. You will never know when you will need that fund in the future.
What not to do when you are borrowing cash
If there are rules that you need to do when you are borrowing money, there are also rules when it comes to what you should not do. Here are 5 things that you need to remember NOT to do when you are asking for a loan.
Don’t borrow if you still have other debts.
Before you borrow money, you usually look at your income to see if you can afford paying for it. While that is logical, there is one more thing that you need to look into: how much debt do you still owe? If you still have a lot of student loans, do you really think it is wise to borrow money for a new car? You may want to find debt relief for some of your credit accounts before you add more credit to your name.
Don’t make borrowing your financial solution.
Believe it or not, some people use debt as a way out of a difficult financial situation. This is a desperate move that you need to avoid. If you use debt for emergency situation, that is a very bad idea. This is why one of our to-do rules is to keep on saving even as you are in debt. It is better for you to have an emergency fund so you can avoid borrowing money just to get yourself out of a financial problem. Sometimes, the problems will make your desperate and unable to make wise decisions when it comes to debt.
Don’t forget to pay on time.
Paying on time is one of the important rules of borrowing money. If you cannot pay on time, you will be charged with late fees. Not only that, if you let it go for a long time, your credit behavior will be reported to the three major credit bureaus. That can compromise your credit score and jeopardize future financial transactions. So if you can help it, just pay your dues on time.
Don’t fall prey to bad lenders.
When you are choosing a loan, you are always advised to seek out the ones with the best terms (e.g. low interest rates, etc). Apart from that, you also have to be careful where you will borrow money. There are some lenders offering rates and terms that are too good to be true. Sometimes, it is too good to be true so you need to be very careful. It is best to check what the law says about your rights as a borrower. According to an article published on ConsumerFinance.gov, the Office of Fair Lending and Equal Opportunity is working hard to identify discriminating practices in the financial markets. You may want to check out their website for more information about borrowing money.
Don’t keep borrowing a secret.
On a last note, you need to avoid keeping your debt a secret – especially when you are married or in a serious relationship. Talk to someone about your debt because that can help increase your sense of responsibility about that debt. If someone knows about it, then they are bound to check if you are paying it off. They could be a great adviser when it comes to financial decisions.
To know more about borrowing money, here is a video from Money Talks News with tips on how you can be smart about it.