Borrowing money can solve your problems. There are times when it is practical to take on a loan to be able to buy things or finance for purchases that will improve your quality of life. But you have to know that borrowing money can also cause problems if not handled the right way.
When is it practical to borrow money?
Before you apply for any type of loan, you must first determine if this is actually the best choice for you. It’s important for you to know that there are two types of debts: good debt and bad debt.
- Good debt – This is the type of debt that lets you pay for things that provide you with value for long-term, more so something that can gain value over time.
- Bad debt – This one is used to pay for existing consumption.
Some examples of good debts are:
- Purchase of a home
- Paying for college degree
- Opening a new business
Meanwhile, bad debts include:
- Purchase of an expensive car
- Paying of utility bills
A house is something that you need, and will even increase in value over time. It is not practical to rent out a property for many years. Taking out a student loan to finance your education is also for your self-development, and is therefore a practical choice to make. So is opening a new business, which can be a good source of passive income.
On the other hand, it’s never a good idea to purchase an expensive car that you cannot afford, and to borrow money for basic needs, as this will spiral you into debt cycle.
Before you borrow money
Before applying for a loan, you need to do the following steps so you know what you’re getting into:
Step # 1 – Analyze your finances
Determine how much money you make in a month, and compute all the expenses that you have both fixed and variable. This will give you a clear picture as to how much of a monthly payment you can comfortably afford.
Step # 2 – Improve your credit rating
Your credit rating is the first thing that lenders look at when they process loan applications. If you have bad credit, you will be charged with higher interest rates. You do not want to burden yourself with an expensive loan so you must first take the time to boost your credit rating.
Step # 3 – Shop around for the best deal
The financial market abounds in loan products with varying rates and costs. You need to shop around to find the best deal for you.
Paying Off the Loan
Tip # 1 – Set reminders to pay on time
It’s costly to miss out on loan payments. You don’t want the extra cost of late penalties so you need to make sure that you pay your monthly due on time. You can do this by setting a reminder using your mobile device.
Tip # 2 – Write and follow a budget
Formulate a budget that will not only include your regular expenses but also your loan payments. Be sure to follow your budget strictly. Even if you have the most comprehensive budget but if you don’t follow it, your efforts are futile.
Tip # 3 – Increase your income
If you are having a hard time making the ends meet, you should seriously consider increasing your income. How do you do this? You can start by looking for a higher paying job. If this is not possible, then look for a part-time job, or get an extra gig.
Tip # 4 – Go on a spending diet
At the same time, you need to go on a spending diet. If you have a loan to pay for, you should be extra careful with your expenses. You can’t afford to spend lavishly on things that you cannot afford as this will ruin your financial plan.
Tip # 5 – Have an emergency fund ready
No matter how financially organized you are, there will be times when unexpected expenses will arise. When this happens, you might find yourself short in cash, and unable to pay the loan. Having an emergency fund will prevent this scenario.
It’s possible to borrow money and not get broke. But you have to do it for the right reason, and do it the right way so you do not get into any kind of trouble.