5 Best Borrowing Strategies
Be Smart With Equity Loans
Ask Before You Borrow
5 Best Borrowing Strategies
Follow these tips and avoid debt problems:
- Keep borrowing in its place. Instead of trying to keep up with neighbors and friends, decide when debt is most useful to you. You'll use it more wisely while also maintaining control. So plan for what you need. Then slowly but steadily save for your goals.
- Know good from bad debt. Purchases you finance should outlast the payments. Your mortgage is an example. It's also a good debt because your house appreciates in value. Education loans can be good investments, too. Bad debt includes almost anything that builds up long-term, unpaid balances. Although items like furniture and TVs last longer than the debt, they depreciate rapidly. So pay in cash or from short-term savings. If you must charge, pay off quickly.
- Know your limits. Just because you can get credit doesn't mean you should use it. Find the right balance between income and debt - always leaving room for unexpected expenses as well as savings.
- Understand what credit costs. Suppose you add a $19 charge to your credit card. If you carry no balance on your card and pay it off within the 20- to 25-day grace period, you won't pay anything more. But what if you have an unpaid $5,000 balance on the card? Because of interest you're already paying, that $19 will end up costing $40!
- Get the best deal. At the credit union, car loans, credit cards and mortgage rates and fees are lower than at the competition. Another terrific bargain is share-secured loans. Ask us for details. Also save by prepaying. The sooner you eliminate debt, the sooner you can save and borrow more.
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Be Smart With Equity Loans
Equity loans use your home as collateral. Here's how to use your investment in your home wisely:
- Borrow for the right reasons. It's sensible to refinance high-priced debt, remodel or pay for college or medical bills with your home's equity. Like an investment, all have the potential to pay you back. Bad reasons to use equity: to fix bad spending habits, improve your standard of living, take a vacation or pay regular bills. Nor should you borrow for tax reasons only. Interest is deductible (assuming you itemize). But taxes aren't the reason to spend home equity.
- Use a loan, if possible, not a line. By borrowing a set amount, you pay less interest and limit your temptation to use more equity. A line of credit is like a credit card. You can keep borrowing up to a defined limit.
- Beware the 100 percent solution. Suppose you have $30,000 in equity on a home worth $100,000. Normally, you can borrow up to 80 percent of the $30,000 - or $24,000. With a 100 percent loan, you can secure the entire $30,000. Is this smart? Probably not. Not only do you pay higher interest but sacrifice all your home's equity. Another problem: If you soon sell your house, you may not be able to cover the mortgage.
- Borrow at our credit union. We have low-cost equity options. Plus, friendly staff to help you decide what's best for you. Call or stop by today.
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Ask Before You Borrow
Today's low rates may be a reason to borrow. Or, not. First, ask these questions:
Can I afford it? Probably — if less than 17 percent of your take-home pay now goes for debt payments. Include car, furniture and equity loans as well as credit cards. Everything except mortgage.
Also important is manageability. If you only pay minimums on monthly credit cards, you're probably overburdened already. More risky signs: You sometimes must choose what bills to pay, you use cash advances for other bills and/or ordinary expenses like food — or you've signed up for additional credit cards because your others are maxed out. Worse yet, you can't save.
If these problems are yours, be careful. Low rates aren't a good excuse to borrow more.
Why am I borrowing? Some purposes are better than others. Don't go into debt for a vacation, meals out — or to satisfy impulses. They're all bad reasons to borrow. Especially if the debt outlasts the expenditure (a one year loan for two weeks' vacation, etc.). Equally difficult to justify is a five-year loan on a car you'll sell in five or six years.
Good debt is productive debt. It makes money. Or, at least saves you money. Using home equity to finance education can be smart. Presumably you're investing in a higher-income future. Plus, gaining tax advantages. Adding a second bathroom also can pay off. You enjoy extra value now — and, hopefully, increase your home's value.
How fast can I repay? Even with low rates, interest adds up. Suppose you take out a $20,000 car loan for six years at 6.5 percent. Total interest: $4,200. Finance for four years — and save $1,500. For fast payback, keep loan terms short. You should be able to repay all installment debt within 18 to 24 months. Or, with savings — in case of job loss, for example.
Remember: Without loans, you free up funds for uncertainties as well as opportunities!
Still want to borrow? Come to the credit union. It's low cost — and friendly!
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