Humans have been borrowing and lending for as old as ancient times. In his book entitled “Debt: The First 5,000 Years,” anthropologist David Graeber cited the first recorded debt system around 3,500 BC in ancient Mesopotamia (modern-day Iraq). It’s so old that it predates money.
So, debt isn’t anything new or unusual. At one point, everybody has asked friends, family members, or a lending agency for some cash to settle unexpected expenses. Of course, the loan soon becomes an expense in itself, but sound money sense will pay it off in no time.
With the pandemic killing millions of jobs, borrowing money has grown from option to necessity. Despite stimulus plans in place, people still have to borrow to settle balances piled up over months of quarantine. Only time can tell when they’ll be able to earn regularly again, if at all.
If you’re among the millions caught in this dilemma, the best thing you can do when borrowing is to be smart about doing it. To help you out, consider these tips on asking for cash without regretting it later:
1. Consider Your Credit Risk
Lenders often take a person’s credit standing into account as it speaks volumes about one’s ability to pay off a loan. Among the essential details that lenders gather when assessing a borrower is their credit score, ranging from 300 to 850 points.
Even though it’s a vital indicator, credit scores alone don’t necessarily tell the whole story. Assessing credit risk also requires looking into the borrower’s annual income, employment status, debt-to-income ratio, and past transactions. They perform this much scrutiny to protect their investment and grant it to people who can handle their money better.
Credit risk determines the kind of loans you’re more likely to be approved; the better your credit profile, the better loans are offered. Conversely, there are loans for those with bad credit, but their terms are less advantageous.
2. Make Sense of Your Debts
Gather all your bills on the table, list their amount dues down on a piece of paper, and take a good look at it. The first step in safely borrowing money is to ask yourself if you really have to borrow. If yes, consider what kind of debts your loan has to pay off.
You can then divide these dues between good debt and bad debt. Good debt pertains to obligations that provide long-term value, such as education and mortgages. On the other hand, bad debt refers to those that devaluate quickly over time, such as car loans and utility bills. While you have to pay both kinds of debt, it’s easier to plan your course of action this way.
Some math may be involved in the process. Compute how much a specific debt will cost you over time, accounting for interest and other factors. When borrowing money, prioritize debt that’ll build your financial portfolio when paid off.
3. Borrow From Family or Lender?
Here’s where it gets a bit tricky. At this point, you most likely have to choose between asking your friends and family or a loan agency for cash. Much like borrowing money itself, both options have their pros and cons.
It’s easy to see that borrowing from people you know and love is the more desirable choice. What parents would turn down their children’s pleas to bail them out of a financial pickle? But a survey of around 2,500 American adults in 2019 showed that intra-family loans end up harming, if not destroying, relationships. Also, most of these loans aren’t in writing.
Experts say lending should be a financial decision, not emotional. Hard facts, not the heart, govern the decision to offer loans, lest risk severing the ties that matter the most to a person. Of course, it also means that people with bad credit will be at a disadvantage when they need the money now.
If you have to borrow from acquaintances, make sure that you can repay them quickly. They need their savings as much as you do, especially in these trying times. Otherwise, apply for a loan with a lending agency and present your case.
4. Save When You Can
If you’ve been saving for the rainy days, you won’t need to take out a big loan, perhaps not need one at all. However, with the pandemic, saving hasn’t been an option for many who have lost their jobs. Still, you should build up your savings account as much as opportunity allows.
One way of saving without your regular income involves taking a page out of Marie Kondo: ‘Get rid of things that no longer spark joy.’ Declutter the house searching for things you can sell without regrets, be it a few clothes you no longer wear or your car. Use the proceeds from the sale to settle the easier debts, reducing the amount to take out via loans.
This method also helps you become more vigilant about making the same purchases in the future. If a car isn’t a priority after getting out of debt, don’t be in a hurry to buy a new one.
5. Professionals Are Your Friends
Everything you’ve read so far comes from finance and debt management experts, which are readily available to read on the internet. They’ve accrued enough experience handling clients with similar troubles, if not worse. Hence, it pays to ask them for advice before going down the rabbit hole.
Thanks to the Web, reaching out to one is as easy as visiting an online forum or watching a webinar. There’s enough information on these platforms to help you make sound decisions.
Knowing more about specific issues is also as easy as messaging experts through social media or personal contacts. All they need from you is to be as detailed about your financial situation as possible.
Don’t be afraid to borrow money when the situation calls for it. These days, living by the paycheck isn’t enough; inflation, among other things, has forced people to look for other ways to earn extra.
However, it pays to know what you’re up against first. This way, you can borrow a reduced amount that lenders are more likely to approve and be repaid quickly. You also won’t risk straining crucial relationships with family and friends by defaulting. Everybody wins.