Don't let debt crush you. Learn how to become an intelligent borrower.
If you’re going to borrow money, you must become an intelligent borrower. If you don't, debt can crush you. And like everything else, there’s a right way and a wrong way to borrow money.
It’s so easy to want something now, to not have the money to buy it, and to decide you're going to borrow what you need. Just about everyone does that. The problem happens when you look at what you want now and ignore future consequences. It is no different than the child who eats too much candy and later develops a belly ache. To become an intelligent borrower you must grow out of those childlike decisions.
A lot of people have given in to temptation only to find themselves under the tremendous weight of debt, suffocating them. Many have to declare bankruptcy. There’s a better way.
Here in part 1, we give you four ways to help you become an intelligent borrower. Let’s get started.
1. Borrow for long term goals, not short term pleasures. Try to take out loans exclusively for purchases that will pay long term returns. Consider, for instance, loans for a residence, a home remodeling, a college education, or a car. And not for a better wardrobe or a European vacation. Instead of borrowing for short term pleasures, set them as goals and save the money so you can pay cash for them.
Here’s one obvious guideline - Never accept a loan that will last longer than what you're buying. There are actually people who owe more on their car than the car is worth.
2. Become an intelligent borrower by applying for the shortest term loan you can manage. Stretch to make the biggest monthly payments that come from a shorter loan term. By doing so, you'll pay less in interest over the life of the loan.
Consider for instance, your choices for a $20,000 car loan at 9.5% . If you choose a five year loan, you'd pay just $420 a month but spend $5,200 on interest. That makes your aggregate payments $25,200. Instead, you can opt for a three year term. Yes your monthly payments would increase to around $640, but you would pay just $3,060 in total interest or $23,060 in total over three years. By biting the bullet and taking on the higher monthly payment, you save $2,140 in interest fee's. What else could you do with $2,140? What if you invested it in a mutual fund? Instead of paying out interest, you'd receive dividends and growth in the value of the stock.
3. Become an intelligent borrower by paying as much as you can up front. When you finance a purchase, put down as much as you can. Don't go by a lender's guidelines. If possible, double or triple the minimum down payment the lender demands. Also, if you can make one or two large payments during the loan's first months without incurring a prepayment penalty, do it. This procedure, known as front-loading, can cut months off your loan, saving you a lot of money.
4. Transer high interest rate credit card debts into a lower rate card or home equity loan. If you carry a balance on a few credit cards, you may be qualified to combine them into one balance on a single low rate card.
Numerous credit cards will send you a balance transfer form or so called convenience checks that you can use to pay off your balances on additional cards. Be certain to ask your issuer to describe its terms on a balance transfer first, many treat transfers as cash advances and you may be charged a transaction fee of $10 or more and charged higher interest on the amount you transfer.
Let's take a look at what can happen: If you transfer your $5,000 balance from a card that charges 18% interest to a card that charges 13% interest, you could save $125 in interest over just the first six months.
An additional alternative is to scoop up debts into a home equity loan, assuming you're a homeowner. Say you're in the 28% federal income tax bracket and transfer $10,000 from credit cards that charge 18% interest into a 9% home equity loan. You'll save about $2,700 in interest payments over five years, plus another $750 or so in federal income taxes, considering the home equity loan interest is tax deductible.
When using a home equity loan, you must be very careful. Be absolutely sure you can pay it back. You do not want to lose your house. You obviously have not become an intelligent borrower if you lose your house.
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Investing your money
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