How to Borrow Money Without Wrecking Your Finances
Whether it’s good or bad debt, owing money is something that most of us have to live with. From home loans to credit card payments and even gym memberships, monthly payments can eat into your salary and make it hard to get by every month.
When debt gets out of control, it can lead to an endless cycle of taking out loans – and it can damage your financial status, making it increasingly difficult to get each subsequent loan.
However, if you manage your debt properly, you can owe money but still be financially secure and maintain a decent credit rating.
Bad debt versus good debt
Bad debt is any kind of debt where the money paid can never be recovered. For example, a car loan is considered bad debt because the car depreciates over time. As a result, it’s possible to owe more on a car than its value at the time you bought it.
Other examples are store accounts, where the interest is high and the end result is a consumable, such as clothes or electronics, that doesn’t have any resale value.
By comparison, an example of good debt is a home loan. The loan amount is large but it’s payable over a long period of time, making it more affordable. Once paid off, you have an asset that has appreciated over time and that you could even sell for a profit later.
Avoiding bad debt
Bad debt is sometimes unavoidable. For example, most people aren’t in a financial position to buy a car with cash, making it necessary to take some form of loan. But reducing your bad debt where possible will have a positive effect on your finances, especially over the long term.
Also, fewer monthly payments and less debt in the eye of the credit authorities will stand you in better stead should you ever wish to take out a home loan, or another form of “good” debt.
Borrow only what you can comfortably afford
Consider the monthly repayments when you apply for a loan. Be aware of exactly how much you can afford to repay each month and ensure that your repayments, after all interest and services fees have been added, don’t strain your budget.
Also, whether you take a personal or business loan, borrow only the amount you absolutely need. Don’t be tempted to take out the maximum approved amount, just because it’s there.
This may seem like a simple way to get some extra money, but a larger loan equals a longer repayment period, which means you’ll end up paying more interest. It also means higher monthly repayments, which can lead to financial strain, along with missed payments and associated penalties.
Never miss payments
Missed payments on traditional, unsecured loans reflect badly on your credit rating – and this kind of track record can be hard to get rid of.
If missing a payment is unavoidable, get in touch with the lender. Arrangements for these circumstances can sometimes be made so that it doesn’t reflect negatively on you or your credit score.
If the issue is long-term one, a debt consolidator or counsellor is an option for helping you manage your debt.
Don’t default to using a particular lender, such as a bank, just because you’ve used them before or a friend recommended them. Compare the costs of loans – includes fees payable as well as interest rates and repayment periods – from different institutions.
Also, consider which lenders offer the best cover in the event that you can’t repay a loan due to retrenchment or serious illness. Many lenders offer cover for these situations, although this will likely add to the monthly amount you have to repay.
Consider asset-based loans
If you or your business owns a paid-off vehicle, you can use the vehicle to secure a short-term, asset-based loan. An asset-based loan has the advantage of not affecting your credit rating.
The lender has no need to consult with credit bureaus because the asset serves as collateral for the loan.
Another advantage is that there’s no risk of your wages being garnished or your other possessions being seized if you default on payments. It’s only the vehicle you offer as security that’s at any risk if you can’t meet the terms of the loan agreement.
Once the loan is paid off, your vehicle is returned to you, in the same condition you left it.
Getting a loan from Pawn My Car
We don’t share any information with credit bureaus; our processes are fast, discreet and transparent; and our interest rates comply with the National Credit Act.