In today’s financial landscape, taking out a loan is not deemed out of the ordinary. In fact, a lot of people resort to borrowing money for a multitude of reasons. There are those who are looking to increase their net worth or simply looking for faster ways to reach their financial goals. It can be taking out a mortgage loan to be able to buy a house.
There are those who takes out a car loan to buy a much needed car for the family or for a business venture. There are also consumers who takes out a loan to start their own business and get their ideas or products out on the market. These are smart ways of borrowing money because consumers need to stay away from the pitfalls of taking out loans.
Sometimes a consumer does not even realize that they are already borrowing money from a lender. That small plastic credit card that they use to pay for purchases is actually an unsecured loan that is being taken out by every swipe of the card. And the use of this card can range from the most mundane and useless expenses to asset-building expenses.
And the numbers are not painting a rosy picture for consumers taking out loans. Bloomberg.com shares in a recent report that consumer debt has increased to the point that it is not at an all time high totalling to over $3 trillion. That is a big amount that consumers need to overcome and bring down to be able to manage their finances a little better.
What to consider before borrowing money
When you are at a crossroad if you are going to borrow money or not, here are a few things you need to consider before making a decision. Remember that these are just part of the process but can help you make a better financial decision.
- Cash flow impact. Before you jump the gun and take out a loan, you need to understand how this would affect your monthly cash flow. It is possible that you can afford the loan based on your salary but when it comes down to it, you need to see the schedule of payments. You might have a hard time meeting those loans when the due date is too far ahead of your pay. Also when it comes to credit cards, you might think that it will just be a small monthly payment but a couple of those purchases can easily balloon up to $100 a month.
- Potential credit score impact. When you are trying to build up your credit score, you might want to understand how a loan application can affect your score. Lenders can conduct a hard pull on your credit score which can dip your score. Too much loan application and too many hard pulls can have significant effect on your score. Although you can always bring it back up, it is advisable to manage these applications to lessen the hard pull on your score.
- Friction between family and friends. When you are taking out a loan, one of the first few options you have is asking family members. You might not realize it but this can strain the relationship between you and that family member or close friend you ask money for. There are times that they cannot afford to loan you money but they still do to preserve the relationship but deep inside, they resent you for asking money in the first place. It can be the other way around and they do not loan you money and you hate them for it. Try to manage these relationship frictions and try to find a way around it.
- Interest payment. USNews.com shares that the average interest rate for a loan that is fixed for 30 years and 15 years recently climbed up. The 30-year loan went up from 3.84% to 3.89% and the 15-year loans from 3.06% to 3.09%. A lot of people would be quick to point out that getting a fixed rate on a loan especially a house is better because it locks in the rate for the duration of the loan. This is great if you intend to live in the house for a very long time but if you will be there for a few years, it might be better to take a variable interest rate. The reason is that this starts out lower than a fixed rate and usually works its way up. If you will in the house for only a few years, you get to pay lower rate on it. If you are taking out a loan, it is important to take note how the interest rate will affect your payments and finances not only for the first few years but in the long run.
- Stuck with the payment. When you are taking out a loan like a mortgage or a car loan, your focus might be on what you are getting and how much it is monthly. This is understandable but you need to also realize that these payments usually takes years to pay off. That car loan can be for about five years or more and that house anywhere from 15 to 30 years. This means that the payments will be in the household budget for years to come. This is a decision that will stay with you for quite a long time.
Making the payments as easy as possible
It is never easy to make loan payments because your mentality is that after you made the payment for the current month, you are just counting the days for the payment next month. Though knowing that you are slowly paying for a house or a car or even that capital you needed to start your business, payments are hard to do. Here are a few ways to help you get through them as painless as possible.
- You need to list it down. Regardless how excellent your memory is, it is not advisable to commit you payment schedule to memory just because you want to show off of you are just tired of making a list. One of the ways to take control of your household budget is to list down all expenses and income that comes in so you can spread them out accordingly. This can help you not only meet your payments and make it easy to remember them but it can contribute to getting you closer to your financial goals.
- Look into auto debit payment. You can make easier payments if you get those redundant ones out of the way. These are the ones that doesn’t change their amounts over the course of time. One step better is to consolidate your loans and apply that new single account under auto payment. This frees up a lot of time on your hands but your focus shift to funding that account you used to pay for the loans rather than sending out payments every month on your own.
- Involve your family. If you already have a family of your own, taking out a loan becomes more and more an option to provide for the family. But when repayment comes around, you need to get everyone involved especially if you are going through some tough financial times. Everyone needs to pitch in and do their part.
- Align and adjust your behaviour. As you go along, you need to constantly align your behaviour and even lifestyle with your loan payments. When you get a salary increase and you are still making a lot of payments, it might be better to continue living under the same budget and use the extra money to pay off your loans first.
Taking out a loan is not something you should dread like a deadly disease because when used correctly, it can help you reach your financial goals. Just don’t forget that all those loans have to he repaid back with interests and a few late payments along the way can spell trouble.