What to Do Before You Borrow Money
Anytime that you borrow money you need to carefully consider if it is the right decision for you. Borrowing money means that you are committing to pay the money back within a certain time frame. You need to consider how borrowing money will affect your finances in the future.You do not want to just take a guess at whether or not you can afford the payment or if it fits into your budget. If you are wondering if you should take out the loan, you should ask yourself these questions before you borrow money.
Do I Really Need to Make This Purchase Now?
Often things that seem necessary really are not. You can postpone most purchases until you have saved up the money to buy the item outright. While it may not be convenient to go to the laundromat to do your laundry, you will save money by paying cash for the item. If it is for something that is recreational such as boat or jet skis, you really can save up the money to buy the items, because they are not necessary purchases. In fact, you may save up the money more quickly than you expect because you are motivated to make those purchases.
Can I Purchase Something Less Expensive Instead?
Often when you are making a big purchase you want to buy the nicest that you possibly can afford. However, you can achieve the same results by scaling back how much you really need. For example, if you are purchasing a car, you may consider spending five thousand on the car instead of ten thousand.
You can still find a reliable car for five thousand, and you save yourself that money to use towards saving and investing in your future. It is important to do your research on major purchases so that you know you are getting the best value for what you can afford to spend. This does not mean that you necessarily buy the cheapest item available, because you do want something that will last and be worth the price.
Doing research can help you determine the best option at the right price point.
This is an essential question to answer honestly. You should consider the limits that this purchase may make on your ability to do things in the future. You may not be able to take as many vacations because you do not have the ability to save money as quickly. Additionally, you may be squeezing the budget so tight that it is extremely difficult to do anything. You may come to resent the purchase, and wish that you had never made it. One thing to consider is your debt to income ratio. You do not want this to get higher than 25% and that includes your mortgage. If you want to buy a home soon, you need to keep this number even lower.
How Fast Can I Pay It Off?
When you take out a loan you should focus on paying it off as quickly as possible. It is important to realize that it is very difficult to build true wealth when you are consistently paying interest to others. When you can turn this around and begin with your money, you will be able to reach your financial goals. That is why it is important to carefully consider all options before you borrow money. Instead of just thinking about making the monthly payments, you should think about ways to pay extra each month.
What Happens If I Can't Pay It Off?
You should also consider the long-term effects if you were to lose your job. This means that you have extra pressure to quickly, because any late payments or skipped payments will affect your credit score. Depending on the industry you are in, you may have a difficult time finding a job if you have a poor credit history. You need to consider how you will pay this loan off if you were to lose your job. If you are in a one income household or you are single, you need to be very careful about any extra debt that you take out.