5 Questions to Ask Yourself Before You Borrow Money

It is such a simple thing in today’s world. You need something, you borrow money. Whether that is through using a credit card, making payments on your cell phone to your cell provider, getting a home equity loan to fund repairs or improvements, or taking out a personal loan or opening a line of credit to pay for a large, unexpected expense, especially in case of Investment property financing.

Need I worn you to be vigilant while considering investment property financing? There are high chances for an investor to get a loan on a property using his property papers as security, but the downside to that would be, if you don’t payback the loan amount in time, you’ll not only lose your property, but also the value of your property, which could increase by 4 times or more, with time.

Before you go and borrow money in any of these ways, you should ask yourself some questions first. This will keep you from borrowing unnecessarily, or from things actually costing you too much in the long run.

Here are five questions you should ask yourself before you borrow money.

Is This a Need or a Want?

Is this something I need, or just something I want to have? The difference is huge when it comes to borrowing money. If you want something, and can get zero interest on a credit card or some other good deal, it may be worth it for you to borrow the money to get it now. However, if you can’t, and it is just a want, borrowing money may not be the best answer.

Needs are a different story. If your car broke down and you need transportation back and forth to work, borrowing for a new car is a good idea. However, the difference between need and want is financing a Mercedes vs. financing a Chevy. Both will get you back and forth to work, but you probably don’t “need” the fancier car. If you have a need and not enough cash, that is the time to look into getting a loan.

Can This Wait for Me to Save Up?

For the answer to this question, let’s use the example of a cell phone. If your phone is working, and you already have it paid off, you can probably afford to wait to save up for the newest iPhone instead of rushing out to get it now. True, you can get interest free payments through most carriers, but think of where you could put that extra payment money each month, and how much you could save?

It is the same with many other items you might wish to purchase. If you can wait to buy them, you will save money both short and long term. If it is a need, and can’t wait, go ahead and borrow money if you need to.

Can I Afford to Pay This Back?

There is a rule of borrowing to only borrow what you can afford to pay back. What does this mean? You need to have a budget, and understand what income you have coming in, where the money you do have is going, and what percentages you need to be saving and investing.

Ideally this leaves you a cushion, and that cushion is where you can put the payments on money that you borrowed. if you cannot afford to borrow because you do not have a big enough cushion, don’t. This will only lead to more borrowing and greater costs for you long term.

Also, if you are using credit cards, be sure you can afford to make more than just the minimum payments. This will enable you to pay things off faster and will be better for your credit score. Paying minimum payments incurs the most interest and the largest cost of items you have charged in the long term.

What Will This Really Cost Me?

This is where interest comes in. The true cost of an item you borrow for is the cost of the item itself plus the cost of the loan. This includes closing costs, document fees, loan origination fees, and the amount of the A.P.R. compounded for the life of the loan.

This is where things can get complicated. You need to know how the interest is figured. When you sign loan documents the lender must reveal the A.P.R. and the full cost of the loan if you were to take the entire time to pay it. Thus, figuring the cost of a loan such as a car loan or mortgage is relatively easy.

Credit cards or lines of credit are a little more complex. The actual amount of the interest depends on how much you borrow and how long it takes you to pay it back. You can figure these things out, but it will take a little bit of math and accounting skills. The rule of thumb is to carry as little balance on your cards as you can and pay them off as quickly as you can. Use lines of credit wisely, and only for needs not wants.

What Impact Will This Have on my Credit Score?

Finally, before you borrow you will need to determine what effect this type of credit will have on your credit score, and what the consequences will be before you borrow. There are a few things that are critical to understand about credit scores and how they are figured.

  • Income to Debt Ratio: You need to be sure that you do not owe so much that your debt is as high or higher than your income. This is a poor ratio, and will keep other lenders from extending credit.
  • Debt Thresholds: If you are going to have really good credit, you should not use more than 30% of your credit limits on your credit cards or in your lines of credit. Carry low balances and pay them off often.
  • Age of Credit: the longer you have had a card or line of credit, the better.
  • Payment History: if you pay things late, even a day late, it can hurt your credit score. Pay on time or early, and never default on a credit obligation.

The effect a borrowing decision has on your credit score is your responsibility and no one else’s. Take it seriously and consider these factors before you borrow money.

Before you borrow, you need to ask yourself some simple questions. These will keep you from foolish spending and debt you do not need to have. It also saves that credit and the amount of money you have access to for times when you truly need it.

Published by Nishitha

I am done with my Physiotherapy Graduation. And I always try to share Health and technology tips with people. Apart from Physiotherapy and being a tech savvy, I do explore more on Technology side and I keep sharing my findings with wider audience.

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