Learn when you should take out a loan and when you should not.
Most of us have loans that we have to pay back. The kid who just got out of school is paying back his student loan, the guy next door is paying back his car loan, and the married couple is paying back their home loan. At some point in our lives, we all have to take out a loan.
So, when should we say yes and when should we say no?
A good place to start would be to think about why you want the loan. It could be for a new business you want to start, an MBA you want to get, a car you really want, a house your kids would love, or that Italian sofa your wife keeps talking about.
For this new company
Try as hard as you can to figure out how profitable your business is. You need profits to pay off your loan, right? If you don't know much about this, talk to your lawyer. Care should be taken when starting a business.
To get that MBA
If you are interested in your career and want to get a loan to further your education (like an MBA), plan ahead. Find out what the difference in pay is between people with and without an MBA. To pay off that loan, you would need to make more money. Check with your employer to see if they offer loans for school (if they do, they usually have interest rates lower than the banks).
For that beautiful convertible
I would say to think twice about the car you are crazy about. If you're going to take out a big loan just to buy that cool convertible that will make your friends jealous, don't do it. Your convertible would have lost its "wow" factor after a few months. You'd be stuck with a loan that will take years to pay back. If you hadn't taken out that loan, you could have saved a lot of money for your retirement.
For that beachside house
Talk to your kids about what they would like in a house. Tell them what they'd have to give up in order to get that house. Whether it's toys, clothes, or the newest cell phone. Let them think about it for a week. Most children would choose the cell phone.
For your spouse
Offer your wife something of equal value but not as useless as an overpriced piece of furniture in exchange for her Italian sofa. Say, buy a comfortable couch at a normal price, but spend more money on a better bed (you spend more time in bed than on the couch, right?). Still, you shouldn't get furniture loans. In two years, they would have worn out, but you would still have to pay off your loan. Talk with your wife about what you can and can't buy.
The three rules of thumb
- If you took out the loan, pay it back as soon as you can. Don't get a new loan to pay off an old loan or credit card debt. It makes things worse and doesn't help at all. If you are stuck in this cycle, you should talk to a financial expert.
- Once you've paid back your loans, you should always think twice before getting another big loan.
- Always know why you want a loan before you take one out. The fastest way to get cash is to take out a loan, but is it worth the long-term commitment?
Some loans are inevitable. Like the loan we need to buy a house so we can have a roof over our heads. Take out that loan, but only to buy a good house, not that beach house. You can get that when you have enough money to pay for it.
