Borrowing Money
Things You Should Know
ABOUT CREDIT
The world runs on credit. Knowing how to use credit wisely is a key to being financially healthy. Misusing credit can lead to debt that overburdens or strips your financial resources.
The principle behind credit is simple: You purchase items or services when needed and you guarantee you will repay the lender according to a set of terms and within the agreed upon time period.
Credit can be a helpful tool for building financial security. It allows you to invest in yourself and build equity when buying a home over several years. It can also enable you to pay for large ticket items such as automobiles over an extended length of time.
When used prudently, credit offers short-term borrowing opportunities through credit cards or department store revolving accounts, for example.
Important:
Credit is best used where the value of an item will outlast the installment payments required to fully pay for the item.
ABOUT SECURED AND UNSECURED LOANS
Secured and unsecured loans are two entirely different types of loans. The difference involves the use of collateral.
Collateral is an asset pledged by a borrower to secure a loan that is subject to seizure in the event of a default. If the borrower doesn't pay back the loan, the collateral (merchandise) must be returned to the lender.
Secured Debt
A debt that is backed by some type of collateral to reduce the lender's risk. Often requires payments over longer periods of time at lower interest rates.
Examples:
- Home loan (mortgage)
- Property loan
- Automobile
- Boat or recreational vehicles
Unsecured Debt
Debt backed by the integrity of the borrower rather than collateral. Often requires payments over shorter periods of time at higher interest rates.
Examples:
- Credit cards
- Department store cards
- Unsecured personal loans
- Credit lines
- Collection agencies
ABOUT KNOWING YOUR LIMITS
Before You Borrow, Ask Yourself:
- Do I have a steady and reliable source of income?
- Is my job (and my spouse's job) secure?
- Do I pay all my regular expenses every month?
- Do I have an emergency fund or extra cash reserves?
- Do I have extra money remaining at the end of each month?
- Will I still be able to save money if I incur this new debt?
Tip!
Download a FREE Budget Tools from the Financial Tool Box [ PDF : XLS ] box above. Simply enter your regular monthly income and expenses, plus amounts commonly spent on "extras" and saving deposits to get a picture of your borrowing limits.
ABOUT SYMPTOMS OF PROBLEM DEBT
Debt Is a Problem When:
- My next month's bills arrive before I've paid last month's bills.
- My bills often include late fees.
- I avoid opening bills when they arrive in the mail.
- I procrastinate balancing my checkbook.
- I bounce checks.
ABOUT LOWERING DEBT
Know What You Owe
The first positive step towards lowering debt is recognizing what you owe. It may seem overwhelming and it may even raise your concerns even further. But arm yourself with the knowledge you need to help you get started. Then contact your creditors and work out a plan for addressing your debts.
Put It On Paper
- Amount owed
- Lender name
- Loan terms
- Interest rate and fees
Be Realistic
Reducing debt takes time. Set reasonable goals. For many people it takes four to five years to become debt free. Stay positive and remember that even athletes have to train for years to become special players. You can do it, too!
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