7 Tips to Help Avoid The Pitfalls of Debt

Debt can get some people into terrible trouble, however it can be an extremely useful thing for others. If you do use debt, it is wise to use it for your advantage and there are many ways that you can do this. Below are just some of the things that you can do to make sure that debt does not consume you and that you use it for positive gain.

Use savings rather than borrowing

If you have some savings then it is always wise to use this rather than paying to borrow money. If you have managed to get interest free credit, then this is different, but you will have to pay for most online loans. Even if you are getting interest on your savings, it is likely to be less than you would pay on a loan, so it would normally make financial sense to use savings to pay for things rather than borrowing or at least to use your savings towards the cost of whatever you are borrowing for.

Only borrow when necessary

It is important to make sure that it is really necessary for you to borrow. Think about what you are spending the money on and whether it is something that you really need. If you can wait then it could be a lot better to save up money each month and then buy the item like that, rather than paying the interest on a loan, which will be a lot more expensive.

Realise money you borrow is not yours

Some borrowers make the mistake of thinking that money they borrow is theirs. They think that an overdraft is their money to spend or their credit limit on a credit card is their money. However, it is so important to remember that money belongs to the lender and it will have to be repaid. They will charge you for the privilege of you borrowing the money and the longer you take to repay it, the more they will charge you.

Ensure you can make the repayments

Most loans require you to make regular repayments. These are very important to make, both making the exact amount as well as making them on time. If you do not make them, then you can be charged extra money and you could even end up losing items that you have used as collateral such as your home or vehicle. So make sure that you are confident that you will be able to make the repayments. Find out how much the repayments will cost and ensure that you have the money to be able to pay for them every month.

Find the most competitive rates

When you are borrowing it is important to make sure that you find some competitive rates. This can make a big difference to the cost of the loan and how much you will have to repay each month. Once you have a loan, it can be possible to change your lender if you find that your rate is no longer competitive so it can be worth checking. There may be a fee for changing lenders though, so do make sure that you are aware of how much this is, if there is one.

Keep a close eye on your finances

It is really important to make sure you are aware of your finances. Be aware of what loans you have a how much you owe. Make sure you know how much income you have and how easy you find it to make those repayments and to cover all of your other bills. Then you will be able to cut back on your spending in some areas, should you start to struggle with your loan repayments.

Pay off early if you can

It can be wise to pay off loans early if you can. This can save you a significant amount of money. You will need to check to see whether there is a fee for paying the loan off early and if there is, whether it will still be cheaper to do so. If you have a selection of loans, then it is best to pay off the one that is costing you the most money, first.

Only Choose “Good” Debts

Believe it or not, there is such a thing as a good debt. It’s often talked about in the old phrase, “it takes money to make money”, and it’s true to an extent. If you take on a debt that’s going to help you to make some money in the long run, you’re going to benefit from it in the long run. For example, when you speak to a mortgage lender about a buy-to-let mortgage, you’re going to be taking on a debt that will enable you to be a landlord in your own right. This is a great way to encourage a new income, and you can get over the fact you have a new debt by knowing it’s more of an investment. Even if you don’t go ahead and live in the house yourself, you’re going to be able to earn an income from it and later, you could sell it when the market is a good one. Other good debts to have include educational debts and business loans. Educational debts like student finance are there to help you to better yourself and improve your career prospects. Business loans are going to do the same thing, but with a new education often comes a new career, and you can earn a better income as a result. This is why it’s a good debt: you’re going to benefit from it in the long run, which will make a difference to your future.

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