Debt can be an overwhelming thing, especially if you have never truly experienced what it like to have the feeling of owing money weighing you down. Taking on debt can be daunting because it is not just about borrowing money. The interest rate, fees, and surcharges that come with taking out a loan are all a part of the conversation when financing any project.
Today, financing has become easier, as traditional institutions and online lenders have made it possible to apply for a Latitude loan and other funding. Worse yet, this convenience can also be the beginning of serious debt for those who are not savvy or careful enough about credit. For these reasons, taking out a loan probably should be the last consideration when looking to fund any project.
Continue reading to learn more about the different types of loans available so that you can make the right choice for your financial future.
Good Debt Vs. Bad Debt
Basically, when looking at whether to take out a loan, prospective borrowers should consider whether or not the loan will benefit them (good debt) or whether it is wasted money (bad debt) in the long run. Home loans, student loans, and any loan that can potentially be an investment in the future are referred to as good debt because when paid off it potentially has a return on investment (ROI).
The ROI for a home loan occurs when the home’s value appreciates and there is equity when the house is worth more than the loan. Other benefits of homeownership include the tax deduction that can be taken as well. With student loans, the ROI translates into the earning potential of the students after finishing their education. In both cases, the debt, when paid off, yields some type of earnings. Once they have some type of work with decent salary, they can also find a lender that assists in refinancing student loans at modest rates to help fix their debt issues.
Bad debt, on the other hand, has no ROI. Credit cards, consolidation loans, and other loans where the borrower gets nothing in return, except merchandise, a service, or a product (including travel), does little for your future finances even though the purchase might make you feel great at the time. When deciding to take out a loan, the first consideration is related to whether the debt is a good or bad one.
Another deciding factor in determining whether you need a loan or not is the purpose. Essentially, when deciding to take out a loan, you should have clear goals and objectives for the use of the money because, regardless of the loan amount, it can be very easy to spend all of the money on everything other than the thing it is intended for. Again, loans that can improve your property or that can aid in making money in the future are purposeful.
Conversely, credit that does not really have a clear purpose can be the beginnings of disabling debt. For example, loans related to celebrations can make the event more festive but, in the long run, could be less purposeful for future finances. In the end, those who take out loans with a clear purpose in mind tend to pay those loans off more quickly and tend to use the money for its intended purpose.
Before looking to take on debt, consider other options outside of financing such as saving. If you are in a position to save the money, set up a budget to fund the project. In fact, another option is to save half of the money and finance the other half. If you are in the position to save, this is probably the best option, even if it takes longer to complete the project.
When To Borrow
The financial circumstances of each borrower are going to be different for each individual. However, when determining whether a loan is right for you, be sure to consider the ROI, the intended purpose, or if there is even a need. These considerations can be the best indicator of whether a loan is right for you.