American comedian Bob Hope once quipped, “A bank is a place that will lend you money if you can prove that you don’t need it.”
Unfortunately, most of us need it.
While borrowing is definitely not essential for every season, it typically plays a critical role in key milestones throughout life — purchasing a house or car, funding an education. Deciding whether or not to get a loan is rarely simple. There are as many opinions out there about borrowing as there are factors to consider.
Some experts say save, save, save until you can afford a big purchase. They suggest waiting until your savings account or sock drawer has enough cash to purchase what you need. Other experts encourage you to get what you need now — especially if it is “good debt” that constitutes an investment, has a low interest rate or raises your credit score — and pay it off as you use and enjoy the thing you purchased.
Proverbs reminds us, “The rich rules over the poor, and the borrower is the slave of the lender” (Proverbs 22:7). Keep in mind: Whoever loans you money has the authority to call the shots.
Though borrowing money is something you need to clearly understand and seek wise counsel on, it is not something to fear. Assuming you lack a very rich uncle begging to buy you your first house, you will probably need to borrow money at some point. Here are four questions to ask yourself before taking out a loan:
1. Is a loan the right choice for my finances right now?
Before you can know if a specific loan is right for you, there are a few things to keep in mind about all loans.
First, always calculate the loan amount plus interest and fees. Some interest rates are sky high. Beware of “introductory offers” that have a low interest rate for a few months because they really make up for lost time if you fail to pay the balance before they raise that rate.
Second, be aware that loans impact your credit score either negatively or positively. This has long-term consequences because it’s a number creditors use to determine your interest rate on a variety of purchases, including your house or car. So, if you are not financially ready for a loan or you struggle to make your payments on time — or make them at all — you will harm your credit score. On the positive side, if you pay a loan back in a timely manner, you will build a better credit rating.
As you consider a loan, shop around online and at several lending institutions to find the best deal. Don’t forget about credit unions — they are technically not-for-profit which means they may offer you an even lower rate than your bank. Avoid lenders that offer payday loans. Loans from these lenders frequently come with exorbitant interest rates, and the annual percentage rate (APR) can run as high as 300 percent.
2. What kind of loan fits my overall financial picture?
Once you’ve decided if a loan right now makes sense for your finances, ask whether the purchase you’re considering is worth going into debt. There are many types of loans — let’s explore the four most common.
Auto loan
There are about as many auto loan offers out there as there are cupholders in a SUV, but beware of the fine print and the deal that looks too good to be true. Many car loans have a “prepayment penalty” that locks you into the interest rate and financing for longer than may be best for you. Always question any “up-front fees.” A legitimate lender will require a loan application and possibly a loan application fee, but won’t collect any other fees to secure the loan.
You may be able to afford the car payment on a monthly basis, but have you budgeted for insurance and maintenance, including oil changes, tire rotations and regular tune-ups? Also, keep in mind that cars depreciate, so each day you sit in traffic your asset loses a little more of its value. Make sure you don’t pay more for reliable transportation than necessary.
Education loan
Grandma always said, “Invest in your education. It is something no one can ever take away from you.” She was right about that and a billion other things, but Grandma never saw the sticker price some colleges are charging for a degree these days.
Further education is often critical for your future, and research shows a college education pays for itself over the long run, but the loan company will expect payback — possibly before your career takes off. There are a variety of ways to get an education and many financially clever ways to go about it. Just be sure you really understand how much you’re borrowing, the interest rate, the total amount you will pay over the years, and just how long you will be paying back that loan.
Also keep in mind that some states and certain majors or careers offer lower interest rates or loan forgiveness.
Home loan
Owning your home has many benefits, including equity, a tax write-off and a house you can call your own. Just make sure you don’t assume a house payment that is more than 30 percent of your gross income. The financial stretch beyond that percentage will be worse than a leaky roof, noisy neighbor or flooded basement.
As with an auto purchase, make sure you’re budgeting for all the expenses when purchasing a home: private mortgage insurance, homeowner’s insurance, inspection fee, appraisal fee, taxes and homeowner association dues.
In addition to the various programs provided by the federal government, many states and cities offer help to first-time homebuyers. Before you look in the master bedroom closet, poke around the internet for information on available housing grants and programs.
Personal loan
These loans come in all shapes and sizes. Some reasons for getting a personal loan could be to pay for a wedding, finance a house remodel, pay off medical debt, cover the expense of a cross-country move or make another large purchase.
The most common use for a personal loan is to consolidate credit card debt. NerdWallet reports, “The average household that’s carrying credit card debt has a balance of $15,654.” Spread over several cards, that’s a lot of debt to chase around. But be very careful if you’re considering a personal loan to pay your credit cards off since the “convenience” of having all of your payments in one place can mean maintenance fees and interest rates that commit you to repaying much more than you ever borrowed. Also, if you don’t address the reason you have all the debt in the first place, that problem may just balloon into a personal loan plus new credit card debt.
If you are considering a personal loan, think twice. It may be wiser to take a little longer and save for a big purchase. You will feel better, and your bank account will too.
3. Am I emotionally ready for a loan right now?
If the worry and stress of borrowing bothers you, you need to consider that “cost” when determining whether to take out a loan. Pray for God’s wisdom and a clear leading from the Holy Spirit. Pay attention to your gut feeling. Our all-knowing God sees the future. He knows what you need and will provide.
Also, get real with yourself and assess if you are trying to “keep up with the Joneses.” The great philosopher and Fresh Prince, Will Smith, once said, “Too many people spend money they haven’t earned, to buy things they don’t want, to impress people they don’t like.”
Are you buying more stuff — a nicer car or a bigger condo — just to fill a void or feel better about yourself? Or is there a legitimate need, and a smart loan will help you?
4. Should I consider a loan from a family member?
This question is a tricky one. Tread very carefully. You would be wise to think, “Which do I need more — the money or a simple relationship with this person?” Money will change your relationship with that person. It just does.
If you decide a family loan might work fine for both of you, get the following items in writing:
- Letter of understanding — clarify the terms of the loan
- Agreed upon interest rate — we suggest the prime rate plus 1 percent
- Payment schedule — including payment amounts and due dates
There is nothing worse than letting money get in the middle of your relationship with a loved one. If a family loan is a necessity, go for it, but show your responsibility and have the above items clearly spelled out. And, of course, always pay it back!
Think About It
At the end of the day, think twice before you borrow. Sharpen your pencil and double-check your math. Crunch the numbers one last time — the fees, the interest and the total cost. Then before you sign on the bottom line, do your best to anticipate any upcoming future expenses. Will you need to move, take a new job, fix up your car or home, travel or give to a special campaign through your church? No one can predict the future, but you can make some educated guesses about potential upcoming expenses.
After you’ve done your homework, move forward with confidence. Get a sensible loan, commit to paying it off, and enjoy whatever you’ve acquired. Look for ways you can use it to bless others. A new condo is a great place to offer comfort to a lonely friend. A reliable car is a wonderful asset to run errands for an elderly neighbor.
If you have decided it’s the right time and have found the best option for you, go for it. Congratulate yourself on this milestone purchase, and remember to celebrate your last payment too.
Copyright 2018 Scott and Bethany Palmer. All rights reserved.
