With a little bit of credit, you can do many things: buy a home, get a new car, get an education, or pay for essential household items. It’s important to remember, however, that it’s far easier to get into debt than to work your way out of it. When you borrow money to make a purchase, you are committing to paying even more for the purchase in the end because of the fees, charges and interest rates that come with the loan.
By making a solid budget, you can avoid the downward spiral of borrowing more than you can afford and stay in control of your credit. The following are just some questions to consider while you budget for borrowing.
Do you really need the loan?
There are two reasons why you may not actually need the loan: you don’t need the item you want to purchase, or you don’t need the item right away. Be honest with yourself. Is the thing you want to purchase really necessary? For example, buying a car because you like the idea of riding in a fancy new car isn’t a good enough reason to go into debt. Similarly, if you agree to buy a second-hand car, then maybe you can save up and buy it outright instead, only at a later date. If you can avoid taking out the loan at all, you’ll be in a far better financial position in the future.
Can you afford the repayments?
Before taking out a loan, look at your budget and decide whether or not you will be able to afford to make the repayments each month. Be realistic about how much you think you could afford if you mortgage rates went up, if you had unexpected expenses, or if a financial emergency arose. If you can’t afford to make the repayments, you certainly can’t afford to get a loan. If you decide you can afford the repayments, you’ll need to come up with a repayment plan and stick to it.
Have you chosen the right type of credit?
If you don’t choose the right type of credit for your situation, you may end up paying more for it than you need to. For example, if you need to make emergency repairs on your car, a fast loan or a credit card will suit your needs better than taking out a second mortgage. When you’re shopping around for credit types, keep the following things in mind: interest rates, monthly repayment costs, total repayment cost, and penalties for late payments.
Is now the right time to borrow?
Your current budget may be telling you it’s safe to take out a short-term loan or line of credit, but you should always think about what could happen in the future that would jeopardise your repayment plan. Is your job secure? Are you planning on starting a family? Do you have any health issues? If you can see any financial bumps down the road, it may be better to start saving now and borrow later.
Deciding whether or not to borrow money isn’t a decision that should be made lightly. While it’s easy to see the short-term advantages of taking out a loan, it’s important that you can budget and plan for the long-term responsibility you will have towards it.