Before borrowing money, it’s always a wise to stop and analyze whether or not it’s really to your benefit. Any loan or charge should help, not hurt your life. There are times when it might be better to use your own resources rather than turn to a lender, but making the right decision isn’t always so easy.
Here’s how to determine when taking out a loan or using a credit card can make sense, and when it might not.
When to borrow
It will enhance your financial situation
Taking out a business loan for your venture can be one of the best decisions you make. You may use the money to cover upfront costs and to pay for expensive items that will lay the foundation for a prosperous enterprise. Or you may want to get a student loan so you can achieve an advanced degree or certification that will lead to more job prospects or higher income.
You want to buy a home or car
Very few people can afford to purchase real estate without a mortgage, or a new or late model vehicle without a financing arrangement. These loans are collateralized by the property, so interest rates are low compared to most unsecured loans. Just be certain you can handle the payments over the duration of the loan’s term.
You need something now, and can delete the debt quickly
Maybe you want a new laptop that costs $1,200 but don’t have that much on hand. If you used your credit card and paid the balance off in a matter of months, the fees can be reasonable. For example, if the APR is 21 percent, and you make fixed payments of $212 for six months, the total interest would be $74. As long as you stick to the payment plan it won’t turn into long-term debt.
You want to build credit
To build credit you need to borrow and repay money from lenders that report to the credit bureaus. Having a mix of credit products that you manage well can drive your credit scores up. Once your scores are high, you’ll be in an advantageous position to qualify for future loans and credit lines with the best terms.
There are no other options
There may come a time when the only way out of a serious problem is to borrow money. In that case, look for the lowest cost credit product you can obtain. Make sure you can meet the payments on time, and delete the debt fast as possible.
When to hold off on borrowing
Your income is insecure
Never apply for a loan or make a charge when your income – and thus your ability to make the payments – is not dependable. If you will be changing jobs, wait until you’re earning as normal.
Financing fees are too high
Consider it a red light when you’re only eligible for credit products with astronomical interest rates or prohibitive terms. It’s an indication that you’re a high risk borrower. The added fees can make the payments very difficult and the final price too high.
It will add greater stress to your life
The relief you experience after borrowing money can be wonderful, but temporary, because you’ll soon need to make the payments. Always review your budget to make sure you can afford them and the rest of your household expenses. If you can’t, every month will be a struggle.
Your expenses exceed your income
If you often run short of funds to cover expenses, you will be borrowing major trouble when you attempt to close the gap with credit cards. Credit lines are not extra income. Decrease spending or increase income instead of charging.
An overabundance of debt will hurt your credit
Avoid adding charges to your credit card when you’re already carrying more debt than you can delete quickly. The amount you owe relative to your credit limit is important to a credit score, so if your revolving balance is already over 30 percent of the limit, suspend charging.
The borrowing bottom line
With the right approach, both loans and credit cards can be used as tools to strengthen your financial position. You can get what you want without having to wait, the fees will be minimal, and you will create and keep a great credit score. And when you know when to avoid borrowing, you will be able to steer clear of unnecessary and overly expensive debt that will drag you down rather than lift you up.
At Valley Bank, we can connect you with resources for all your financial planning needs. Contact us today to learn more.
Disclaimer: All content is for educational purposes only and does not constitute financial advice.