Three Keys to Smarter Borrowing
Your first home, a new car, college tuition – for most of us, borrowing money is what makes these major life purchases possible. But as with most things, there are smart and not-so-smart ways to borrow. Your friends at FMB or other financial advisors can help you navigate the details, but first, here are three principles you should always keep in mind.
1. It’s always a buyer’s market
For many of us, our first borrowing experience involves one of two things – a car loan, or our first credit card. Young consumers with no established credit history often assume they won’t be eligible for most borrowing options, so they jump at the first offer. In truth, there’s no need to rush.
Always remember that you are the customer, and that means you’re in charge. Credit cards, in particular, can be almost too easy to get (more on that in a minute). Take your time, shop around, and find the opportunity that truly suits your needs. If you don’t find the right opportunity, consider whether you can wait a few months. Better options will emerge as you build up a track record of paying your bills on time.
2. Not all loans are created equal
This may sound obvious, but it’s important to remember that a loan is a debt. Some debt is worth taking on, some is not. Likewise, some forms or sources of debt (who gives you the loan, and under what terms) are better than others. A loan from your bank or credit union is generally your best option, while other sources like 0% APR credit cards, buy now/pay later plans, personal lines of credit, or even a loan from your own 401(k) account are acceptable options that give you more flexibility in certain situations. This helpful chart from Nerd Wallet compares the advantages and drawbacks of each.
There are also some options that you should avoid altogether. They may look like a quick solution in a tough situation, but more often they will simply give you one more problem to deal with. What are they? Keep reading.
3. Do this, not that
Borrowing money is so commonplace that carrying zero debt – particularly in young adulthood – may not be practical for most people. But again, not all borrowing is created equal. To be a smart borrower, remember these pointers:
- DO learn how to save. It’s not possible to borrow your way to prosperity, and in the end, you will need to learn to set aside money and defer purchases if you want to come out on top. Patience and self-discipline are muscles worth developing.
- DO NOT borrow money that you don’t really need. It may simplify things in the short term or enable instant gratification on a purchase you’ve been looking forward to, but it’s still a debt. If you can choose whether to borrow, don’t.
- DO make all your payments on time. This doesn’t just go for money you borrow – it’s just as important to pay your rent, household bills, and one-time expenses like home repairs or medical bills on time. This will help you establish a strong credit history, which will save you money on future borrowing for large items like a first home.
- DO NOT borrow money or take on any other debt if it will cause you to make late payments on any of your other expenses. Missed or late payments hurt your credit score, raise your cost to borrow, and can result in late-payment penalties.
- DO consider borrowing for items that appreciate in value. The most common example of this is a home mortgage. Few people will ever save enough to buy in cash, and investing in a home is one of the best ways to generate wealth over time.
- DO NOT rack up consumer debt on credit cards. The thrill of buying something new won’t last as long as the monthly payments and higher interest rates you’ll be dealing with for months or years. Worse yet, consumer items almost always depreciate in value. This is a great opportunity to develop that “savings” muscle. Take the time to save up for that new outfit or family vacation. You’ll enjoy it more when you do!
- DO your homework and deal with reputable lending institutions that will charge you a fair interest rate. Banks and credit unions have numerous regulations to ensure that they will treat you right.
- DO NOT resort to high-interest/short-term installment loans or “pay day” lenders. This type of borrowing targets people with poor credit histories. It makes money available to some who cannot otherwise get a loan, but sky-high interest rates and penalties often leave people worse off than when the started. If you are tempted to borrow from such an institution, call us or another no-fee credit counselor first.
If you’d like to talk more about these ideas or have other questions, just call 800-695-2045 and talk to one of our experts. After all, keeping you smart is what we’re about!