Though it’s an issue that’s often brushed under the carpet, debt is typically the rule rather than the exception here in the US. In fact, when you consider everything from consumer debt through to mortgages, student loans, etc., the average American racks up an impressive $90,460 of debt in their lifetime.
It’s all too easy to look at that figure and gasp. Certainly, no one should take such large sums lightly. But, when you consider just how normal these surprisingly large amounts of debt are in everyday society, it does beg the question of who the demonisation of borrowing actually serves.
That’s not to say, of course, that unchecked lending is ever a good idea. But, in some cases, loans and borrowing, in general, can be a real lifesaver. Without our student debts, for instance, we wouldn’t be able to achieve salaries that can meet those payments. Without accessible options like no guarantor loans, many of us wouldn’t be able to put a deposit down on our first rental. The list goes on – sometimes, borrowing is an essential.
Certainly, talking about rather than burying this lending trend leaves the doors open for education that’s guaranteed to prove way more useful for achieving sensible borrowing at last. But, what should this financial education look like, and how can it help you to keep your head above the lending water?
Understanding how to borrow within your capabilities
While lenders are being held increasingly accountable for their affordability checks, making sure you can repay what you borrow is largely down to you. Ultimately, there needn’t be anything wrong with spending a little on your credit card so long as you can comfortably repay the full amount when your bill comes through. In fact, lending in this way can prove beneficial to your credit score.
The main thing to remember is that affordability isn’t about being able to scrape your monthly savings. Rather, you need to be sure that you can comfortably meet your payments with money to spare lest lending rates change. Specifically with home loans, it’s recommended that you ensure you can continue to cover your payment each month, even if rates creep to the highest they’ve been in the past 20 years.
The importance of taking it one loan at a time
Lending only really becomes a problem when it gets out of control which, unfortunately, is something that happens far too often. In reality, managing debt needn’t be an extreme undertaking if borrowers simply remember to curb their loans as much as possible.
In an ideal world, this means only taking out one loan at a time, or not lending any money when you already have a credit card to pay. Of course, that doesn’t always work out, in which case turning to a consolidation loan can simplify, and thus secure, your repayment strategy. Plenty of companies offer this benefit, and it can make a huge difference for not only easing stress but also allowing for financial organization that simply wouldn’t be possible otherwise. Not to mention that it’s the best possible way to clear your debts quickly!
Finances often fail if you pay one loan with another
Along the same lines of avoiding the dreaded ‘loan snowball effect’, it’s vital to remember that it’s never a good idea to pay one loan with another, except for consolidation loans as already mentioned. In a general sense, though, lending on top of lending is where the majority of people find that repayments unravel. After all, there’s no end to a borrowing habit like this, and it can be next to impossible to keep track of where you’re at which, as mentioned above, matters a great deal.
The sad fact is that far from clearing your name, borrowing on top of borrowing can lead to further financial problems in no time. Even if you’re worried about escalating interest payments or upcoming payment dates, you’re thus guaranteed to be in a worse position if you borrow again. Rather than even considering that, it’s always worth speaking to your original lender. They do have plans in place for situations where people can’t meet payments, and these include payment holidays or even revised payment amounts. While these do increase interest, sometimes quite drastically, this considered approach is still going to cost you a whole lot less in the long run.
Learning the joy of overpayments
We all know we have the option to overpay our loans but, if we don’t need to, most of us will avoid doing so or even looking into the benefits. In reality, though, paying even $50-$100 a month extra on anything from a car loan to a mortgage could reduce the term of the agreement by as much as a year for every year of repayments. That’s a notable amount if you’re facing a forty-year mortgage or similar, and it’s a benefit that we should all be far more willing to enjoy.
Of course, unless you know about overpayments, you won’t know the benefits or even whether this option is included in your lending agreement. If in doubt, this information should be included in the small print, but most lenders will have some form of overpayment arrangement. Mortgages, in particular, offer overpayment options, though note that there is a charge if you exceed a stated cap, which is typically 10% of the amount outstanding. Once you’ve worked that much out, negligible amounts of money here and there could have a not-so-negligible impact on your lending habits and history moving forward.
A final word
For obvious reasons, education doesn’t make unchecked lending an option. Rather, learning these crucial lessons means that people are armed with the resources they need should they ever have to take this path. Given that we never know quite where life will take us, that’s a reassurance that we could all benefit from. Even if you don’t have any debts outstanding right now, then, keep these tips in mind to ensure that you’re forever a sensible lender in future.