By Dennis Cail, CEO and co-founder of Zirtue
Many people have obtained a loan that they may have regretted for a variety of reasons – whether it be the interest rate was too high or they realized they couldn’t afford the monthly payments. Loan mistakes can easily cause long-term damage to individuals’ finances.
American household debt hit a record $14.64 trillion in the spring of 2021, largely due to an increase in mortgage and car loans. So, what can borrowers do to ensure they aren’t ruining their financial futures because of a loan mistake?
These are tips for avoiding borrowing mistakes that will derail financial futures:
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Accepting the first loan offered
Loans are products that we receive in the form of cash with terms. My number one tip when it comes to borrowing money is to shop around just as you would when shopping for any product. Never accept the first loan offered. Look at a variety of lending options and banking institutions and compare them side-by-side before agreeing to one. While a loan may sound great when you are sitting in front of the loan officer, the terms may look less beneficial after comparing it to other offers. -
Taking on debt that isn’t worth it
Never spend money you don’t have on things you don’t need. Before taking on any debt, especially when it comes at a high-interest rate, always ask yourself first if this is really worth it or if it can wait. If you are able to wait, you may realize it is not worth it or may find a lower interest rate for your loan. -
Taking on more than you can handle
I never advise taking on more debt than you can handle. Before taking on any debt, take a long look at your finances and make sure you can afford to take this on, while considering what the loan is really getting you. Taking on debt to purchase an asset that will have positive cash flow makes much more financial sense than taking on consumer debt to purchase something that only depreciates in value, like a TV. -
Only focusing on the interest: While interest rates are critically important, loans are much more complex and often have many more factors at play. Including your income along with your debt-to-income ratio factors into how fast you can repay a loan; in lieu of getting upside down on the loan. Take a close look at all of the details of the loan, beyond just the interest rate, and make sure you understand all the terms, conditions and your limits before agreeing to a loan. Here some suggestions by Gordon Simmons Service Credit Union Banker.
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Not considering loans from friends and family
It’s hard to find more friendly loan terms than the terms you can get from friends and family. These tend to be the most affordable and forgivable loans you can find. If your loved ones are in a position to loan you money with no impact to your credit score, consider taking that loan over a bank loan and thank your loved one by paying them back. When making a friendly loan, make sure you set a formal agreement with a timeline, payment schedule, and interest rates. I co-founded an app, Zirtue, for these types of situations that can help formalize loans between loved ones by turning informal promises into structured agreements and automating the repayment process.
