When you hear stories about people who struggle to get out of debt, it’s easy to think that such a scenario should be easy to avoid. But if you’re considering taking out a loan to pay for something, whether it’s a 4K TV or a new home in the Phoenix area, these best practices will help you to properly evaluate spending and find the best mortgage lender in Tempe, for instance, while avoiding common mistakes that others have made.
Plan for payment
Most people will recognize the good sense in the commonly circulated nugget of advice to borrow only what you can afford. But actually putting that into practice will require more detail and assumes that the prospective borrower already has some sound financial habits; clearly, that’s not always the case, or there would be fewer people struggling to get out of debt each day.
Before you take out a loan, it’s essential to work out the details and have a plan for payment. What is your debt-to-income ratio? You’ll need a concrete idea of how much you’ll be left with each month after balancing net income versus essential expenses, minus the expected monthly payments towards your loan. Without the actual numbers, you’ll be operating blindly; that makes it tough to have sufficient financial flexibility to cover emergency expenses or unforeseen events, such as a pay cut or illness. Consequently, if you miss a payment, you’ll end up having to pay a little bit more next time, and this can easily snowball into a mountain of debt.
Borrow for the right purposes
In basic terms, a loan can be considered as a promise of future goods or services; you apply to acquire funds now from a financial institution, and the implication is that your future employment (or other means of generating income) will be used to settle the debt. We all know that the future can be uncertain; many recent events have strained both international relations and individual employment prospects. Thus, while you can justify a loan for emergency medical needs, it hardly makes sense to borrow money for non-essential items, such as luxury goods or travel. Likewise, using a loan to make an investment, such as buying shares of stock, is basically doubling your exposure to the risks of the future. Such purchases should be made with disposable income; it’s better to find ways to reduce spending or bring in additional income so that you can afford to pay cash for these things.
Always shop around
Do a quick search online and you can easily see that not all loan rates are equal. Various financing options will offer different terms – from the amount of funding available to the duration, fees, and interest rates involved. This step will benefit even more from the planning invested in the first stage; you’ll know what you can afford and thus work hard to minimize upfront payments, closing costs, or transaction fees. It takes time and effort to shop around, but if you’re well-prepared – by raising your credit score ahead of time, understanding the fees involved, and reading the fine print – you’ll leave less money on the table and slightly but significantly lessen the financial burden you have to bear over the months and years to come.
Even before you apply for a loan, make sure that it’s for the right reasons and have a concrete plan so that you know what to look for as you shop around and find the option which fits best with your current and future means.
Meta Title: Find the Financing That Fits Within Your Means Using These Tips
Meta Description: In part, avoiding debt requires responsible practices when borrowing money – these three tips will help you make sound decisions.