Your Guide to Wise Borrowing
Saving money is certainly on everyone’s agenda, but there is something to be said for the person who knows how to properly leverage borrowed money. There are a ton of people who borrow money for the best intentions, only to end up burning through it with not much to show. In the modern world, saving for big ticket items is simply not possible – houses and cars are beyond the means of the average working class person to find the means to put 20% down. It is essential to learn the basics of good borrowing, and the first lesson is how and where to do it.
Understanding the difference between “good debt” and “bad debt” is essential if you want to learn how to be a great borrower. In general, “good debt” is debt that is incurred to make a substantial investment in your future. “Bad debt” can be many things, but usually encompasses consumer debt or debt that is too expensive, such as a payday loan or maxing out high interest credit cards while not paying them back in full right away.
For instance, borrowing money to finance an education is good debt. So is borrowing to purchase a home in a good neighborhood. Even borrowing for an expansion on a home through a home equity loan can be considered good debt, because those improvements may lead to an increase in the value of the real estate.
Bad debt is borrowing to finance a vacation or a shopping spree. The resources that you obtain from this debt are short lived and cannot be used as assets. The only way to pay back this debt is to work harder and earn more money. Working to pay off unnecessary debt is never a smart financial move.
Cars are looked upon as good debt by some and as bad debt by others. The trick to buying a car with borrowed money is never to overspend on luxuries. Also, if you live in an area with public transportation, you may be able to forego the use of a car.
Look into used cars as an option rather than buying a brand new car off the lot. Cars are generally considered a good debt purchase if you need one in order to garner gainful employment in your area. Cars are, however, a depreciating asset. Meaning when you buy a car today, the value continues to drop over time. Where as a good investment in a home, thriving stock, mutual fund, CD, etc rises in value over time.
Where Can I Get a Loan?
You can get a loan from many places. The best options are listed below.
Banks – This is the traditional option; however, other types of lending institutions may be a better deal. Banks operate in a hugely regulated, competitive environment. They have lots of paperwork and usually require tighter guidelines for lending.
Credit unions – Credit unions are often considered the same as a bank, but they are owned by the customers instead of by investors from the outside. Fees and rates may be lower at a credit union than at a bank. This is a good option aside from a traditional bank. Member oriented, a lot of times credit unions can do more and be more flexible with their customers.
Online lenders – Lending online is now a viable source of funding for the average person. With the speed of the digital age, lending online has become very popular over the last 10 years or so. If your the type of person who is busy, on the go, don’t feel the need to talk to a banker face to face, or just prefer a faster method of lending, Obtaining financing online may be a good fit for you. Make sure to do your due diligence online and do business with a reputable online lending company. Make sure you also see the green https:// in the header of your browser like you do with our company website. You also may look into peer to peer options or non-bank lenders. This is an especially prevalent option if you do not qualify at a traditional bank.
Mortgage broker – If you are looking to buy a home, these brokers specialize in lending for real estate. A lot of time Mortgage brokers can streamline the lending process for you. This is a step you can perform on your own, however, make sure to realize that when your working with your real estate agent, they typically have business relationships with mortgage brokers who can cut down on time to close and save you time with fooling around to secure your financing which could cost you a deal.
Hard money lenders – If you are looking to buy real estate, but you are not a traditional home owner, this may be a great option for you. They typically work with short term investments and are more than welcome to provide high interest rates for their money as well. This can be a good option if you have a definitive plan for your real estate flip in say 6-10 months or so. If you have a more favorable relationship with a banker, that would be paramount.
US government – The government finances student loans, auto loans and real estate loans. They often have some of the best rates on the market. You can also grab an SBA loan to start a small business. There are grants available and other programs like FHA when buying a home. Just understand that there is more paperwork involved and more scrutiny as well. Although can be very handy when Uncle Sam is watching your back to buy your first home. Not only does the government scrutinize you as the lendee, they also take a hard look at who your doing business with.
What are the different loan types?
There are may loan types when it comes to securing financing for just about anything. Unsecured loans are usually the best for the borrower, but worst for the lender. They do not require the borrower to put up any collateral to get the money. Secured loans require collateral; however, they may offer lower interest rates.
Home equity loans and business loans are loan packages that leverage your assets. You may be able to borrow money based on the future receipts of your business or on the equity that you have in your home.