By Lina Martinez
There are a lot of misconceptions about borrowing. In part, it’s down to the sheer lack of financial education, but also, it isn’t helped by the increasingly complicated world of finance. Opinions rather than facts seem to override critical financial decisions for many. The result is that many people end up missing out or paying more than they should. In today’s guide, we’re going to debunk some of the most common myths about borrowing. Read on to find out more. We hope it will shine a new light on financing for those who, understandably, struggle to separate fact from fiction.
Debt is bad
Twenty or thirty years ago, the idea of having a credit card was anathema to most households. In those days, the only people that built up debt were the wealthy or those in serious financial strife. However, debt has slowly become part of our society, and if you use it with care, it can be a great financial tool. There is, however, good debt and bad debt. Buying a home, for example, can be ‘good’ debt. The problem lies when you start supporting your lifestyle with money you cannot afford to borrow. If your debt stays within your means, there is nothing wrong with it at all. Just make sure you are paying that money back in the cheapest way possible.
Credit cards are bad
It’s true that using credit cards can lead to financial issues if you aren’t careful. But on the whole, they can be fantastic tools for your finances. As long as you pay off your balance in full at the end of the month, you will face no interest charges at all. And, each time you repay your credit card, it has a positive impact on your credit rating. Once your credit score goes up, you will find it easier to get better rates for a loans or mortgages in the future. You should also be aware that many credit cards offer points, cash back, and even air miles. If you use them wisely, you can free up money by using credit cards, giving you more to spend, save, or invest.
You should never take out short term loans
The short term or payday loan industry is rightly criticized for its crazy interest rates. And, wherever possible, they should be avoided. But let’s take a look at the facts. According to Personal Money Store, payday loans tend to be cheaper than a bounced check or disconnection by your utility company. So, if you can guarantee that you will pay them back within the right time frame, they can cost less than the alternatives. As with all borrowing, it’s vital to understand the costs before you apply and to weigh them up against the expense of those options. The idea behind borrowing is to do so as cheaply as you can, and if you have no other means, then payday loans might be an answer. Just make sure that you pay them back on time, or you will lose all the savings - and a whole lot more besides.
You should borrow as much as you can
When lenders offer you an amount of money, do you question it? If not, you should. Try to avoid borrowing all the money that is available to you, as it can have a significant impact on your finances in the future. For example, just because a credit card company says you can borrow $10,000, doesn't’ mean you can afford to pay it back. Make sure you are aware of your personal limitations and never max out a loan or credit card. This is true for home loans, too. Yes, you might get a bigger house by borrowing more money. But the slightest change in base interest rates could well see you in a tricky financial position.
You can't negotiate interest rates
Interest rates are not set in stone when it comes to borrowing. Most people are so in awe of the banks and other lenders that they don’t realize negotiation is possible. Interest rates are set by the lenders, so there is always flexibility. You should use this to your advantage when looking for better deals and never be afraid of pressing for a second - or third - offer. For example, let’s say you find a home loan with a preferred lender, but it’s more expensive than a pre-qualified offer from another company. There is nothing to stop you trying to negotiate the preferential rate - and most banks will consider your request. Even shaving 0.5% off the interest rate can result in enormous savings over the lifetime of a home loan.
We hope you found some value in these tips - let us know your thoughts in the comments!
Lina Martinez is a contributor to zenruption's money, business and life sections. She is also the wrong person to play either quarters or poker against. There is no doubt that several of us have funded her shopping trips.
Feature photo courtesy of Flickr, under Creative Commons Attribution-Noncommercial license