Borrowing can solve your immediate financial problems, or help you buy something you need. But sometimes people get it completely wrong. Even the best financial initiatives can sometimes turn out to be stupid borrowing strategies if inappropriately planned and analyzed.
Having the Wrong Reasons for Borrowing Money
In fact, getting a loan can turn out to be the worst thing you can do. Here are some wrong reasons for borrowing and why you need to think it through.
1. The Loan is the Last Resort
If a loan is the only funding option you have available, then it’s not a good idea to go ahead. You probably already have a credit card debt, perhaps an overdraft, and you have now run out of options. It is not a good time to get a loan. Obtaining a loan as a last resort will put you in more financial difficulties, and you will find it very hard to keep up with the payments.
2. Buying Something You Want
A loan should have an economic benefit for you and be a necessity. Applying for a loan for a purchase of something you want, but obviously cannot afford, is not a smart idea. A credit for an essential item is okay. But to buy clothing or an electronic device that you like and cannot afford right now is kind of dumb.
3. Using a Personal Loan to Buy a Property
You want to buy a property, but your mortgage lender will not provide the funds. Don’t be tempted to borrow for a deposit. If you do that, then the house will be worth less than your borrowings.
4. Not Avoiding That Unbeatable Deal
You might be tempted to apply for a loan because the advert you saw is offering a fantastic rate. Step back and think about what you are doing. There’s a saying that if the deal is too good to be true, then it usually is. Opportunities like that typically have hidden charges or a commercial catch somewhere. If the unbeatable deal is the primary driver for you getting a loan, it’s not a good idea.
Choosing Dumb Ways to Borrow Money
Some loans available on the market today are merely a waste of money. The main problem with borrowing is that individuals often tend to borrow for the wrong reasons. While we all have emergencies in our lives and we don’t always have money to throw at the problem, it’s not still the case. People find various ways to get their hands on money without a thought for the costs and the consequences. Here are a few of the worst styles of loans you can take:
5. Payday Loans
There is a really good reason why some states in the US have banned these types of loans. The charges on a Payday Loan can be 10% to 25%. And that’s before the lender hits you with an APR that can be as high as 400%. Payday Loans or cash advances usually have to be paid back on your next payday. You sometimes have to write a check for the amount so that the lender can take it from your account automatically on the due date. What happens to most borrowers of Payday Loans is that they continually roll over the owed amount. They find it hard to get out of the cycle as the amount increases.
6. A Cash Advance on Your Credit Card
Usually, a purchase of an item on your Credit Card attracts interest after a month. This is not so with a cash advance. Interest starts immediately. With interest rates at around 16% – 25% on these cards, a cash advance is just crazy.
7. Pawning Items
Pawn shops provide you with a loan in exchange for them holding something of yours that is valuable as security. Firstly, the amount offered is usually a fraction of the real value, and the associated fees and interest rates can be killers. Go into a pawn shop and see how many items there are for sale. Why? Because the owner of the goods never had the money to redeem the item.
8. Reverse Mortgage
There’s good and bad in a reverse mortgage, and a lot depends on the individual and his or her family as well. For a senior who may have not a lot of years left to live and wants to enjoy life and stay in the home, the reverse mortgage can work. But these days, people are living a lot longer, and then there’s the kids’ inheritance to consider. If the family members are all well off and are not depending on a windfall when an elderly relative dies, it’s not a bad idea. If a mortgagee lives a long time, they might find themselves without a home in which to live.
9. Spending Your Tax Return Before You Get It
Requesting your tax return funds before they are due is the epitome of instant gratification. There are fees for doing this, around 10% of the total due, so it better be an emergency rather than a holiday in the Bahamas! People should think twice before taking this avenue to obtain money.
10. Borrowing From Friends And Family
This method has been a recipe for disaster since humans populated the planet! There’s nothing like a money problem between friends or family members to sour a relationship. It’s better that you be too embarrassed to ask!
11. Blind Borrowing
It is entirely up to you to do some research before borrowing money. Engaging in such transactions only because someone told you so, and without doing your “homework” beforehand speaks about a complete lack of responsibility on your part.
Silly Ways to Pay Back a Loan
If you are about to pay back a loan the wrong way, and that means opting for the ‘quick fix’ option, it can cost you money and sometimes make you drown in debt.
12. Borrowing on Your 401K Funds
You shouldn’t even be borrowing from your 401K, and primarily using it to lessen your liability. There are some very negative aspects to consider before taking this approach.
- Firstly, the company for which you work may not allow you to contribute to the fund anymore until the debt is paid.
- Secondly, your wages will be less as the repayments are deducted from that amount.
- Thirdly, you have to stick with the employer until the loan is paid back. If you leave the company, the entire loan will need to be repaid, or else there will be fees and taxes applied.
As you can see, this method has no saving graces at all and is a terrible idea.
13. Applying for a Mortgage Refinance
If your debt was unsecured, adding a bad debt to your mortgage is a bad idea. Imagine not being able to repay the mortgage. You end up with no home as well as a bad credit rating. Double bad.
14. Credit Card Transfer Balance
When banks introduced this, they knew they would be picking up accounts from other credit card companies. These accounts were usually paying interest only. The intro 0% rate is finished in 6 months after which the new Credit Card Holding bank starts making money. Also, you can’t keep transferring as there are fees involved.
15. Loan Consolidation with a High-Interest Rate
There is absolutely no point in paying a higher interest rate when you were struggling to pay all the smaller accounts before consolidation. While your repayments look a lot less, they might be over a more extended period. Do the maths and see how much in total you will be paying.