Sometimes, the amount of money we have at our disposal is not enough to meet our needs. If you need some extra cash to start a new business, pay school fees, buy a car, pay for emergency room services, etc., you may have to borrow some money. The problem with borrowing is that you have to pay it back, and lenders impose additional charges such as interest and even hidden fees. People may advise you against borrowing, but it might be helpful if you have a good plan. The big question is, are there good and bad ways of borrowing money. What are the dos and don’ts? Well, read on to find out more.
Good Ways to Borrow Money
1. Comparing Various Sources
Today, you can easily choose from a wide variety of sources if you decide to borrow money. The most common ones include family members, friends, credit cards, credit unions, community banks, and large institutional banks. How do you know where to borrow your money from, based on all the various options? The answer to this question is that you need to compare the available sources and choose the one that suits your needs. Here, your needs include the amount of money you want and the terms of payment. Think twice before you go for the first source you come across.
2. Telling the Truth about the Purpose of the Money
The people or institutions you are borrowing money from have the right to know what you intend to do with the money. Even if you want to spend the money on something that seems ridiculous, don’t lie about it. If your prospective lender is skeptical about your intentions, give them a detailed explanation to convince them. Don’t beat around the bush even if you feel embarrassed. After all, we all face challenges in life. You can always look for a different source if they choose not to lend you the money. With that said, you can see why it is vital to look for alternatives.
3. Paying Off Your Debt in Time
In most cases, borrowed money has to be paid back with interest. In fact, you can easily secure a loan from friends if you offer to pay interest, even if they don’t want it. Trouble begins when you fail to pay back in time because the interest will keep on accumulating depending on the type of interest you signed up for when borrowing the money. If you are not careful, you may eventually spend more than double the amount you borrowed! Remember to pay back in time to avoid such problems.
Bad Ways to Borrow Money
1. Forgetting the Agreement or Terms and Conditions
You will put your collateral at risk if you borrow money and fail to create an agreement stating the applicable terms and conditions. This may sound stupid if you are borrowing the money from a family member or friend, but it is necessary because humans can forget easily. An agreement will save you if your friend decides to change or misunderstands the terms, so it is important to create one. Similarly, make sure that you read the terms and conditions when you take out a loan from a bank or any other financial institution. You may incur some hidden fees if you don’t know the terms.
2. Borrowing Without Informing Your Partner or Spouse
If you have a spouse, one of the biggest mistakes you should avoid is to borrow money behind their back. Such a decision will not only put your property at risk but also ruin your relationship if you fail to pay back in time, and your lenders come asking for their money. What will you tell your spouse when auctioneers show up at your door? Well, think about it before you borrow money without informing them. Likewise, you will get into trouble if you take out a business loan without informing your partner. If the unexpected happens and you are unable to pay off the debt, you might lose your business. You can avoid these problems by consulting your spouse or partner before borrowing.
3. Going for Bad Debt
There are two types of debt: good debt and bad debt. Good debt brings financial benefits and can increase your net worth. On the other hand, bad debt harms your financial future. Instead of borrowing money to buy depreciating assets, borrow for good long-term purposes, such as your own or your children’s education, a business vehicle, or business capital. Don’t borrow for fancy cars, jewellery, clothes, and momentary pleasure like vacations. The point is that you should not put everything you want on credit, especially if you don’t know where you will get the money to pay back.
All in all, it is perfectly fine to borrow money if there is a good reason. There is a thin line between good debt and bad, depending on what is important to an individual. A good borrower does not incur debt to purchase things that will quickly lose value. If you are thinking of borrowing money, make sure that it’s for an emergency or that it will generate long-term income. In case you have trouble making the right decision, there is no need to keep it to yourself. Feel free to seek help from credit counsellors, so you can make the appropriate decision. Finally, involve the key stakeholders and remember to clear your debt in time.