Let’s stop for a moment on what we think we know. Our entire mindset towards everything is built on what we think we know. Millions of Americans think they understand things like loans and debt. However, they still struggle in both these areas, which leads to mistakes that cost them tens of thousands of dollars or more throughout their years. In order to understand where we are making financial mistakes, we first have to understand our finances.
What does living your life cost you each month? That’s the question you need to ask yourself. Make a list and focus on your income and your expenses. If you are making more than you are spending each month, that’s great. However, what many forget is that income may not be consistent, but debt does not change. If your income is subject to change, you need to focus on ways to manage your expenses and cut down on your debt.
What Is Debt?
If you are borrowing money, debt is the amount you owe. It is not your monthly payment which is heavily influenced by interest. Your debt is what you need to pay the lenders back in order to not owe them anymore. In most cases, you can pay this off immediately without furter fees. What we often overlook is that the lower the actual amount we owe, the lower our debt-to-income ratio becomes.
When we look to borrow money, we need to think about this factor as it will be how lenders determine whether or not we can afford to pay them back. This ratio, will impact your ability to borrow and how much, more than any factor individually throughout the loan process. In a sense, the less you owe, the more you can borrow.
How Is A Loan Different From Debt?
If you want to take a different viewpoint of finances, you have to literally look at things differently. When you take out a loan, you are borrowing directly from a lender at an agreed-upon interest rate, along with the length of years the loan will be stretched out. That’s what your loan is in a sense, what you have to pay each month and for how long.
When you think about your mortgage compared to your credit card, you are not as concerned with your mortgage even though it may be hundreds of thousands of dollars in debt. The reason is because the interest rate and years are in your favor in comparison to a credit card. The longer you pay a credit card, the more you spend, without having the benefit of lower monthly payments in comparison to a mortgage.
How Do Loans Impact Debt?
Loans determine if your debt is manageable. For example, we are not as concerned with borrowing for a car, as long as we can if the interest rates are low and we also can save on the monthly cost. Remember, debt-to-income ratio? Even though you may be paying more in the long-term because you extended the length of your payments, you are able to keep your monthly costs down.
Keeping monthly costs down, is one of the smartest ways to manage debt. If you currently have a large number of expenses including rent, credit card payments, internet, streaming services, health insurance, car insurance and so forth, you can see how your monthly payment on a car loan could be very beneficial.
What Loans Work Best?
There are dozens of loan options to consider and this is where you need to first consider your personal finances and options. For example, are you a veteran? Many veterans struggle with debt because much of their expenses are covered while they are in service. Therefore, their finances are completely altered, even if they are able to find reliable and steady employment immediately. Because of this, there are several loan options for veterans that include lower interest rates, lower down payments, the opportunity to manage the monthly payments better and so forth. It’s a great option to have and something that many would love to be able to utilize.
When we take out a loan, we are borrowing to cover the cost of something. The trick is to get the interest rate as low as possible so that we can also manage the monthly costs to pay it back. Borrowing at low rates is always the best practice. The lower the rate, the less you have to pay them back for borrowing the money. The problem is, and the reason why people cannot just randomly borrow all they want, is that you have to have something to cover the cost of the debt, like collateral, but also have enough space in your debt-to-income ratio to borrow it. Don’t forget, the ratio includes the interest payment each month, which is another reason why those rates are so important in the beginning.
A personal loan might be the exception to this in some ways. If you are looking to borrow the money to cover your tuition, get your car fixed, cover home repairs, or pay off your credit card and it’s high interest rates, then a personal loan may be the solution. Because you can base what you are borrowing on collateral, you are able to expand your reach a bit if it can help you cover your debt or get you into a house that is far more affordable each month than paying rent. There are options in borrowing money that you need to research as they may be options that offer you advantages you did not expect.