Borrowing money is so easy to do these days. If the first place won’t lend it to you, there is often another place that will, at a cost of course.
The following are 6 tips you can take to avoid borrowing mistakes:
- Take your time in making a decision
It is seldom the case that you must make a decision regarding borrowing money, while sitting with the loans officer, but the pressure is often on you to do so. It’s ok to say that you would like some time to make the decision. In fact, I would offer that it is a necessary part of your wise purchasing process. The next time you are considering borrowing money, get the information you need, go home and ‘sleep on it’ to ensure you are making an informed and rational decision.
- Be aware of the interest rate
Prior to even starting the borrowing process, look up the prime interest rate or ask someone in the lending industry what the rate is. Or, if you have other credit, look at the rate you are paying on your loans, credit cards and/or lines of credit. That will give you a base point of reference. When you are going through the application process, you can then ask the lender what rate you qualify for AND what you can do to qualify for a better rate. It may be that you just take a few simples steps to get your interest rate down, such as closing an old credit card account or cleaning something up on your credit report.
- Calculate the total cost of borrowing
Something else that you can do is to calculate the cost of borrowing and you can do the math in the meeting with your loans officer or ask them what you will be paying in total. For example, let’s say you are financing a $20,000 vehicle and the payments are going to be $450 for five years –the total cost of that vehicle is $27,000. Once you see the number in front of you, you can then decide if it is a comfortable purchase for you. You may then change your mind and purchase a less expensive car, or pay it off in a shorter time, or come up with a down payment to reduce the amount you will pay overall. This is a great tip when buying something on sale with credit …. calculate the total cost you will pay and it’s likely not much of a sale after the interest costs are added.
- Get a second opinion
It is generally always a good idea to get a second opinion. Shop around. Make sure you are getting the best deal and the best rate possible. The only exception to this is if you are concerned about the number of inquiries on your credit report negatively impacting your credit score (which may increasing your qualifying interest rate). As a general rule of thumb, you do not want more than three credit inquiries (for new credit, called ‘hard hits’) in a 12-month period and you do not want them all close together.
- Consider all alternatives first
Explore other options. For example, is there another way to deal with this purchase? Could you buy the item second hand? (Especially furniture and appliances). Could you borrow the item? Or Rent it? (Consider tool rentals for home renovations or vehicle rentals for trips). Could you delay the purchase and save up a down payment? Or a larger down payment? Often times, it is just too easy to finance it and we don’t even take the time to consider other options. Or, and this is likely more true, we are so used to ‘instant gratification’ that we don’t like waiting to get something we want.
- Take a friend with you
If financial decisions are not comfortable for you, or you tend to succumb to the sale pressure to decide on the spot, take a friend with you who can help you decipher the information, ask the right questions, or encourage you to ‘think it over’.
In summary
All of this comes down to being a conscious consumer. This is your life we are talking about. Financing now fuels the “live now, pay later” lifestyle. It may seem like a good idea in the “now” but I can guarantee you the “later” can be riddled with guilt where decisions were rushed or not thought through beforehand.
It’s your life. It’s your money. Part with it wisely!
Wishing you happy, healthy finances.
