Money can solve a lot of problems. Sometimes it makes sense to borrow money for things that will improve your life over the long-term. But money can also cause problems—especially if you owe a lot. So how can you borrow money wisely?

Think about it

The first step is to make sure that borrowing is actually the right choice. Debt can pay for things that provide long-term value and possibly even gain value over time. Debt can also pay for current consumption, assets that depreciate in value too fast like new cars etc.

Wise debt choices include:

  • A college degree, since people with a degree will tend to earn more over their lifetimes (and they have more career choices)
  • The purchase of an affordable home, it can provide long-term financial benefits and control over your environment (you might even get to sell it at a profit someday)

Unwise debt choices include:

  • Buying an expensive car, because it will lose value immediately, and continue to lose value over time (you might even owe more than the car is worth)
  • Paying bills, since there is no way you can keep borrowing to cover basic expenses—it will all come to an ugly end someday

Before you borrow, evaluate how long the debt will last and how much it will cost in total, adding principal and interest. Compared it to how long the benefits will last and to what amounts they will rise or fall. If it is not an investment in your future, look at other ways to fund the need.

Work the numbers

It is important to pay the right price for anything you buy. For example, when shopping for a car, the focus is often on your monthly payment instead of the purchase price.

Your monthly payments and the terms of your loan are still important. Look at your income and expenses and figure out how much you can comfortably afford to pay for your new loan.

If the payments will be a burden. Then either pick something less expensive or make a larger down payment so that you’ve got more room to move if you fall on hard times.

To see how much you might need to pay on your debt, run some numbers. You can do all of the calculations yourself or use computers and online calculators to make the job easier.

Keep in mind that your monthly payment for any loan will depend on the amount, term, and interest rate of the loan (which is highly dependent on your credit score).

 

Until next time.

The MoneyShop Team

 

This article has been prepared for information purposes only and it does not constitute legal, financial, or medical advice. The publication, journalist, and companies or individuals providing commentary cannot be held liable in any way. Readers are advised to seek legal, financial, or medical advice where appropriate.