Some people tell you that borrowing money is never a good idea, but that is not the case. There are always going to be some occasions where you are going to have to borrow money, whether it is purchasing a house or a car or handling an unexpected bill. That’s not a problem, as long as you borrow money in the right way and avoid some of the big mistakes that many people make in this situation. Here, we look at some of the biggest borrowing mistakes you need to avoid.
Relying on credit cards to live
Unfortunately, life has a habit of throwing you a curveball, and your monthly expenses become higher than your earnings. This is a situation where you might want to look at a credit card, to make sure that all of your essential bills are paid on time. That’s fine in an emergency, but some people end up relying on their credit cards to live, or to increase their earnings every month.
This isn’t a good strategy for managing your money because you usually end up paying off the balance and then using it straight away, which means all you are doing is wasting your money on interest payments. When you find that you always need to borrow money or use your credit card at the end of each month, you need to take another look at your budget and adjust your outgoings accordingly. That may mean cutting out luxuries until your finances are back on track.
Not taking out the right sort of loan
If you take out a loan, you need to look at the different options to find the best loan for that situation. Because it is often something that needs dealing with quickly, many people rush into it and don’t make the best choice.
For example, if you are thinking about starting a business, you need a specific business loan rather than a personal one. However, if you are looking at renovating your house, look at the options for secured property loans because, in most cases, you are going to get a better interest rate.
Spend some time looking at all the options, check for fees and repayment terms hidden in the small print, and use tools such as interest rate calculators, so you know exactly how much you will end up paying back.
Borrowing more than you need
Borrowing for non-essentials is never ideal, but even if you borrow money in an emergency, you may be tempted to borrow more than you need.
When you submit a request for a loan, the credit provider may tell you what the maximum amount you are eligible for is. Many people end up borrowing more than they originally intended because they think that having extra money will make life easier for them.
However, that is only the case in the short term, because when you have to start making the monthly repayments, it is going to be a lot harder to manage your monthly budget. The best thing to do is to work out precisely what you need to borrow before you apply for a loan and stick to that.
Borrowing money for the non-essentials
As we said earlier, there are situations where borrowing money is a necessity, but there are a lot of cases when it isn’t. If you are maxing out your credit cards every month, buying luxuries like meals out or trips, you are going to end up in a financial mess for no good reason. If your car breaks down, your boiler starts leaking or another emergency crops up, by all means, take out the money you need to sort it. However, before you take out any credit, you need to think about whether or not you really need to borrow that money. If it is not essential, then don’t!
Borrowing from friends and family
If you’re in a difficult financial situation and you’re behind in a lot of payments, you might find it hard to get a loan or other credit because you have a bad credit rating. In this situation, you might decide to turn to family and friends to borrow money, and if they can afford it, they will probably be happy to help. However, that can sometimes be a huge risk. Borrowing money from friends or family can change your relationship with that person changes, and if you’re struggling to repay it, it can lead to a lot of tension and arguments.
If you don’t have any other choice and you have to borrow from friends and family, you need to set some clear guidelines to protect everyone involved. Think about it in the same way that you would have any other loan and make sure you give priority to paying it back.