5 Lessons on Smart Borrowing

Borrowing money is a huge obligation, something not many people consider when they call up their private lender or march down to the bank. Smart borrowing practices ensure that you can gradually pay for the loans you take out and protect you from bankruptcy. Here are five lessons you need to drill down on.

Know What It’s For

There are two major classifications of expenses – investment and liability. It’s okay to borrow money if you are spending it on something that could potentially grow more money, such as stocks, or protect you from liabilities like an insurance plan. It’s not smart, however, to buy a car, jewelry, or branded clothing that begin to depreciate as soon as you take them off the store. Exercise restraint if you recognize the loan is for a liability rather than an investment.

Reduce Debt

Managing debt makes practical sense for several reasons. Accrued monthly interest rates can affect the growth of your personal finances. In addition to the unneeded financial stress, you also risk damaging your credit score if you fail to make payments within the scheduled intervals. Ultimately, with your poor credit scores, it will be more expensive to borrow money from banks or even impossible to get approved. Look at your outstanding balances and try to pay them in order of the highest to lowest interest rates.

Make Home Improvements

While we’ve already mentioned investments versus liabilities in the first lesson, it’s worth emphasizing home improvements as one of the smart reasons why you’d want to borrow money. Securing a home equity loan or line of credit is great if you’re making home improvements that add to the property’s value. Smart home improvement projects include adding a patio or renovating your bathroom. For home projects that add nominal to no value at all, consider paying cash upfront or only taking short-term loans that are coupled with low interest rates.

Think About Education

Education is and should only be an investment, right? Nowadays, however, the rising cost of education has made it a questionable investment for some, especially if you are majoring on courses that have weak anticipated future demand. Even those pursuing engineering and business studies find it difficult to get work after they graduate. Think about whether or not the educational path you are pursuing is worth the loans you are about to shoulder. Also, think about the school providing the program. Are their graduates satisfied with the work they have now post-college?

Consider Borrowing From People You Know

Family, friends, and colleagues can lend you money with minimal to no interest at all. A caveat to this guideline is to be careful who you borrow it from. Loans between friends or family members tend to be treated personally rather than as a business transaction. While you should indeed be grateful, agree on terms beforehand.

These five lessons can completely change the way you handle debt. You can further augment it by consulting a financial adviser or studying your other options, such as crowdfunding and peer-to-peer lending. Weigh the pros and cons of your options and then decide which path to take.