Borrowing Wisely Is The Key To Good Financial Health
Life is unpredictable and financial emergencies can spring out of nowhere, giving you little time to prepare. While you can foresee expenses related to education, it is difficult to predict other emergencies like medical treatments.
Often, borrowing makes sense and it can bring about a change in your life for the better, but you need to do so cautiously. It can potentially lead to bigger troubles if you end up owing more than you can repay.
Loans As An Investment
While there is a general fear associated with borrowing, it can also be beneficial. It makes sense to borrow for an investment where you expect higher returns compared to the risk you are taking on.
A manageable debt can pay off in the future with great value, which would only increase with time. Here are some examples of how borrowing can be an excellent investment in your future.
- Education - Getting a good degree from a reputable institution can help you land a good job. When your starting salary is good, it will only be a matter of time before you clear your student debt.
- Home Ownership - The environment you live in has a substantial effect on your mental health and overall well-being. A mortgage could be the right investment to lead a healthy and settled life in a property you love. If the property value rises over time, you could even sell it for a profit. You can also consider home improvement loans if you are looking to upgrade your existing property.
- Starting A Business - It makes sense for small businesses to get a loan that covers their initial operational costs. Once the business gets going and becomes profitable, clearing the debt quickly should make it more manageable.
How To Get Approved
The loan approval process is simple if you keep the following points in mind.
- Application - You need to make a formal application whether you choose an online lender, traditional bank, or credit union. Filling out the application form should take minutes depending on the institution you choose. Keep personal information handy like your Social Security number and proof of income.
- Approval - Depending on the loan provider you choose, the approval process could take several days or weeks. The fastest you can expect to get approved is likely to be with your own bank, as they already know you, your income, and expenses. When you opt for online lenders, it could take up to a week to receive the funds.
- Responsibility - Being responsible is key when taking out a loan. When you borrow, it is important to consider different lenders for the rates and terms they offer. You must only spend a sensible amount on whatever you wish to buy.
- Caution - In many cases, lenders might lure you with installment options, even if the purchase price of the product you are buying is out of your reach. Watch out for high interest rates and tough terms to avoid paying more than what you initially intended.
Managing Your Risk
Here are some risk factors you must consider before borrowing.
- Interest Rates - Even if you qualify for a loan, you should think hard about interest rates. Some personal loans might feature APRs of less than 10%, while some others could be three times higher. Credit scores determine the interest rates a lender will offer, but some lenders might charge an arbitrary number so long as it is legal. You could choose payday loans but you should endeavor to avoid these unless you need immediate financing and have limited options.
- Monthly Repayments - Your monthly repayment amount should not affect your minimum monthly expenses. You should think of saving some cash each month towards building an emergency fund.
- Effect On Credit Score - Some factors that affect your credit score include payment history, credit utilization, credit mix, credit history length, and new credit. Even if you have a good score, borrow only according to your needs. Repay in a timely manner, as it can boost your score and improve your repayment history.
- Flexibility - Are you seeking to consolidate debt or pay off debt fast? Some loans do not allow early repayment, and if you do so, they might require a penalty fee. Consider what flexibility is available from the loan you are weighing up.
Research thoroughly when you borrow. Get details from online lenders, banks, and credit unions, and study the interest rates and terms they offer given they will vary by lender.
You can end up saving a significant amount if you compare different offers. However, it is advisable to make your decision within 30 days to avoid letting it affect your credit score. Your credit score takes a hit when you keep applying for multiple loans which may end up forcing some lenders to reconsider.