Borrowing Mistakes to Avoid

Written by , November 18, 2011

Borrowing Mistakes to AvoidMost of us do everything we can to avoid getting sick. We wash our hands regularly, make sure our food is adequately cooked and do all of the other little things so that we don’t come down with a cold or the flu.

Unfortunately, we don’t always pay as much attention to our financial health. In many cases, any financial difficulties we find ourselves in are a direct result of our own actions or in-actions. Just as we try to avoid getting sick, we should avoid the bad decisions that could damage our financial well-being.

Here is some information and advice on borrowing mistakes you must avoid.

  • Borrowing Too Much. One of the biggest mistakes that many people make is borrowing too much money. It happens a lot when taking out a home loan. Loan officers and real estate brokers usually talk in terms of your maximum borrowing ability – not how big of a home would be appropriate for you and your family, but what is the most you can afford. This is a dangerous way of thinking, and can lead to problems if your employment or other financial situation changes. Think about what you need, rather than what’s the most you can get.
  • Borrowing For the Wrong Reasons. Borrowing for the wrong reason is almost as bad as borrowing too much money. Putting yourself into debt should be done for “needs” and not “wants.” Your home, automobile (assuming it’s the right model for your needs and budget) and education are probably good reasons to borrow. A luxury vacation is probably not.
  • Not Considering The Repayment Term. Any borrowing you make sure to have a repayment term that is appropriate for the thing you are going to be purchasing with the loan proceeds. A 15 or 30 year loan is appropriate to buy a house or condominium, but a five or six year loan is too long to be paying for an older used car.
  • Not Considering Total Costs. Other fees are of particular concern when it comes to home mortgages. We must consider points, closing costs and other fees when we are budgeting for a new loan. Even with an automobile purchase, we need to keep in mind that the loan payments will not be the only recurring expense will be responsible for – they are our costs for car insurance, maintenance, etc.
  • Assuming the Absolute Best Case. Don’t assume that your income (or the value of your home) will grow to meet future demands of the loan. Before the most recent real estate market decline, many people were eager to take out loans that had a very low interest rate for a small number of years, and then required a large “balloon” payment. The thinking was that the home would increase in value enough that there would be plenty of equity to afford (through refinance or “flipping”) that balloon payment. Things didn’t turn out so well for many of those borrowers. Hope for the best, but plan for the worst.
  • With our own personal health, we can always take steps to keep ourselves healthy, or we can allow ourselves to get sick and try to deal with the illness. The same holds true for our financial health. Avoid making mistakes when borrowing money and you’ll have a greater chance of keeping a good financial bill of health.

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