Monday, March 28, 2011

Are you prepared to be in debt?


Are you thinking of taking a loan to purchase your first house or to buy your dream car? The question is: Are you ready to obtain financial assistance from a financial institution and be committed? Let us examine several issues about getting into debt:

1.      Do you need a loan: The wise thing to do is to get a loan for what you need and not what you want. When you get a loan you are going to pay not just the amount borrowed but interest on the loan as well. The larger the loan, the longer it takes for you to repay the loan, the more you will have to pay for the interest. The other thing to consider is that the loan, for the purchase of a house or a car, is secured by the financial institution as collateral. In the event of a default the house or the car will be disposed off to settle the outstanding balance of the loan. So the house you live in or the car that you are driving around is not yours until you fully settle the loan. However, it is very common to get a loan to purchase a house or a car. .

2.      Shop around: Do your homework and shop around because interest is an important factor. There are two types of interest rate: fixed and variable. Get a loan that suits your need.

3.      Part of a monthly budget:  The other more critical factor to consider is that the monthly loan repayments must be within your means. Be a responsible borrower and make sure to factor in the amount in your monthly budget. Perhaps it is even better to save for a bigger down payment so that the monthly amount to pay is even smaller.

4.      Commitment: When you have taken up a loan, it is your duty to honor it. You need to uphold your credit worthiness. It is also a moral obligation to return what you have borrowed. How do you feel when someone borrow some money from you and never see you again? Fulfill your commitment.

5.      Car loan:  Car loan is of special concern. The key is not to borrow too much for too long a time. A motor vehicle is a depreciating asset.  Its value decreases as years go by. In the event of a default you may need to top up the difference despite the fact that the bank has already repossessed and sold your vehicle. It is because its value is very much less than the amount you owe the bank. Consider buying a small car with a small loan for a short duration.

Debt is beautiful only after it is repaid.  ~ Russian proverb


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