Borrowing Responsibly: Read This BEFORE You Borrow Money
HOW TO BORROW MONEY RESPONSIBLY
Life happens. You can be responsible with money, save 20% or more of your paycheck and have a healthy rainy-day fund. Then one job loss, one unfortunate accident or health scare later and suddenly that rainy day can feel more like a hurricane. It’s life and it happens. Finding that you need to borrow money to stay afloat can feel like a slippery slope into debt, but it doesn’t have to be. Learning to borrow responsibly can make a huge difference in your financial standing and your borrowing power in the future.
Check Your Priorities
We’re not sure where it started, but somehow Christmas time for Bahamians means new everything. We’re fine all year long and then suddenly on Dec 1st on the dot the couch suddenly looks shabby, your pot set is too old and your bathroom needs a whole makeover from rugs to towels. Before you march down to that loan office ask yourself, when I’m paying back the loan every month - will this be worth it?
Borrowing money should not be a decision made on a whim. Ask yourself these three questions before you decide to borrow:
Do I honestly need what I’m borrowing to purchase?
Is what I’m purchasing worth the interest I will have to pay on it?
Will not making this purchase affect me negatively a month or year from now?
If you answered no to these questions, it’s time to reevaluate the reason you need this loan. You’re not borrowing responsibly if you take out loans for unimportant things. Responsible borrowers are disciplined borrowers. This brings us to our next point:-
Easy money sounds good, but it’s not realistic to borrow $10,000 when you only need $5,000. The most important thing to remember is that borrowed money is not free money. You will have to pay it back at a cost - interest. Never borrow more money than you can comfortably repay. By comfortably, we mean without leaving yourself stressed and looking for money every time your monthly payments come around.
Have an open and honest conversation with your loan officer about why you need the money. Ask them to directly calculate your interest rate over your loan term and go over all penalties. It may sound off-putting but knowing the risks upfront helps you be realistic about how much you need to borrow. Responsible borrowers are realistic with themselves and their loan officers.
Make Your Monthly Payments - Yes, Every Month
Every. Single. Month. The reason is simple- late fees suck. Late fees make all the difference between manageable monthly payments and a growing mountain of debt impossible to climb. A late fee can take a digestible $150 monthly payment to an uncomfortable $200 payment that balloons each month you miss. Staying ahead of your payments is the best way to manage your loan and stay in control of your finances.
Your monthly payment is where discipline and priorities combine. We know it’s not fun to watch money disappear from your bank account when you think about all the things you could use that money for, but paying back your loan should be the first payment you make. If you find yourself struggling to make your payments you should do two things:
Check your monthly budget or bank statements to see what costs you can eliminate.
Talk to your lender before you default on a payment and be honest. You’d be surprised how flexible they can be with you.
More importantly, remember that making timely payments show lenders that you are a credible borrower and could increase your credit limit when it comes time for more important loans like mortgages. Borrowers who make their payments are responsible borrowers lenders can trust.
Look out for more articles from our Responsible Borrowing series.