Borrowing money seems like it’s just a natural part of life these days. Where it used to be considered a last resort, now most of us just factor debt into our monthly finances. The cost of living is going up but our income isn’t going up at the same rate so there’s often a shortfall that needs to be made up with borrowing. But are we too quick to borrow money? If there’s something that we need to buy, we’ll often just reach for the credit card without thinking about whether we actually need to spend that money. We’ll take out a student loan for college even though we have a job and can pay for it. There are some circumstances where it is sensible to borrow, but others where it just isn’t necessary. So, how do you know which it is?
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Do You Need To Make The Purchase?
This is the first question you should be asking yourself. If you are borrowing money because the boiler is broken and you can’t afford to fix it right now, that’s fine. You need heating and hot water so borrowing money for it is fine. However, if you’re spending the money on a new car or a vacation, you don’t desperately need those things. You can still buy that stuff, just put it off for a few months and actually save up the money. That way, you aren’t paying all of that expensive interest on top.
Can You Get A Good Rate?
Speaking of interest rates, how high are they on the loan that you want to take out? If you’ve got a poor credit score, you’ll only get accepted for loans that have a high interest rate on them. That’s just going to get you into more financial trouble. If that’s you, look at how to improve credit score and try to make some changes. Once you’ve increased your score, you’ll be able to borrow that money at a much more affordable rate.
Have You Got Savings?
A lot of people make the mistake of borrowing instead of using their savings because they think that, as long as they’ve got savings, they’re doing well financially. The thing is, if you borrow money and then start paying loads of interest on it, you’ll have less money to put aside in your savings anyway. It’s far more sensible to use your savings for whatever urgent purchase you need and then top it up again later on. You won’t have debts hanging over you and you don’t risk getting yourself into serious financial trouble by taking out lots of loans.
Can You Make Cutbacks?
If you find that you’re borrowing and using credit cards every month just to make ends meet, you’ve got a problem somewhere; you’ve got more going out than coming in. Finding a job that pays more money is one solution, but the obvious thing to do is just spend less money. People will often tell you that they absolutely can’t afford to make cutbacks but this is rarely true. If you tracked every single penny that you spent for a month, you’d be surprised at just how much you’re wasting on stuff you just don’t need to buy. Cut those purchases out and you might find that you don’t need to borrow any money.
There are certain times when borrowing is the right thing to do, but make sure you answer these 4 questions before you do.
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