When borrowing for the first time, everybody hopes that the debt will help them overcome their immediate financial crisis. This works for those that are disciplined enough to repay the borrowed money and live a manageable lifestyle. In fact, many people have used debt to set themselves towards financial success.
For others, however, the ending isn’t so rosy. Without the skill or discipline to repay your debts, you will end up in worse financial problems as you keep borrowing to sustain yourself. You can avoid putting yourself in such a situation by being smart about your debts.
Here are a few pointers you can use to avoid debt pitfalls and set yourself towards financial stability.
Stick to good debt only
Good debt is a debt that is absolutely necessary such as a debt to pay for medical fees, school fees, or one that you invest to give you considerable returns. In the best-case scenario, a well-invested good debt should repay itself.
On the other hand, bad debt is used to make an unnecessary and unbeneficial purchase. For instance, a debt that is used to buy a new car that you don’t need is bad debt. Such a debt will not generate income to pay the owed amount and will only eat into your income.
To determine whether the loan you are about to apply for is necessary; evaluate your life to determine whether it is absolutely necessary. Also, consider saving up instead of borrowing.
Seek cheaper options
Often, there is a cheaper option for the item you want to use your debt to borrow. If you live far from public transport, it might be logical to buy a car to use to and from work. However, you do not need to buy a new car if you can't afford it. You can buy a secondhand car and buy a better one as your finances improve.
If you are struggling to pay your rent and are having to take loans, consider getting a roommate to help you bear the burden.
Budgeting and disciplined expenditure
Budgeting and financial discipline go hand in hand. You need to be disciplined to discern what expenses are important and those that you can do without. Then you will need to be disciplined to stick to your budget.
If you struggle with impulse buying, try buying your things in bulk like once a week. This reduces the trips you make the supermarket and the temptation that comes seeing items on sale.
The combination of budget and discipline will help you not only manage your debt but eliminate it completely.
Set up a personal emergency fund
Debt becomes inevitable if an emergency occurs and you don’t have the financial ability to pay for it. It is therefore prudent to set an emergency fund for yourself when you are doing well financially to avoid such a moment of desperation.
The fund will help you take care of minor emergencies. Even in the case of a major emergency that your fund can't fully cater to, you will need to borrow a less amount. The savings can also give you some grace period to carefully shop for a guaranteed loan offer with better terms.
If you must borrow, be a smart borrower
It would be really unfortunate if you need a loan but your credit history doesn’t allow you to borrow from certain institutions or you get the loan at very unfavorable terms. To avoid this, work on your finances and credit history to ensure you are creditworthy.
Here are a few tips you can use to boost your credit status:
- Pay your bill and loans in time
- If you notice an error on your credit report card, dispute it promptly
- Avoid changing your residence and job often
- Don’t push your credit usage to the limit
Being a smart borrower also means looking for a lender that offers the best terms. Look, for instance, for lenders that are flexible and allow you to renegotiate your deal in the course of your repayment period.
In some way, this may fall under being a smart borrower but it is too broad and needs to be addressed independently.
Debt consolidation refers to the process of getting one relatively huge loan to repay several smaller loans.
You should consider debt consolidation under the following conditions:
- If you get a loan offer that has better terms than the cumulative terms of your existing debts
- If you have too many small loans that you find it hard to keep up with their individual repayment schedules
- To free the assets you have used to secure some of the smaller loans
Major benefits of debt consolidation:
- It is easier to manage one huge loan than several small loans
- The one-time repayment of your debts can greatly improve your credit score
- Less stress dealing with several debt collectors
- Often results in better rates and terms of the loan
Several people have used debts to free themselves from a financial crisis and propel themselves to prosperity. Unfortunately, some people have become dependent on loans and use them to fund their lifestyles. Such people often end in unmanageable debt, bankruptcy, and a perpetual financial crisis.
To avoid going down the path of financial ruin, you need to be disciplined so that you only take necessary debts. You also need to be a smart borrower so that you take debt at favorable conditions and use it efficiently.