In your life and in your business you will need to borrow money at some point
Often, people pay their monthly bills without taking a close look at the role that interest plays in what they owe. “It's important to look at interest rates and how many years it will take you to pay off a balance, and what is that going to cost you over the lifetime of the debt,” says David Bach, vice chairman of Edelman Financial and founder of FinishRich.com. Once you know, you're in a position to make better borrowing decisions, and find the most favorable rates and terms for your needs.
It's very easy to end up in a borrowing situation that you didn't realize you signed up for, says Kathleen Burns Kingsbury, wealth psychology expert and author of “How to Give Financial Advice to Couples.”
You've probably heard stories of people applying for credit, only to find out that they are rejected because of a low credit score they didn't know they had. That doesn't happen to a savvy borrower, because he's done his homework first, says Bach. “Smart borrowers pull their credit report and try to correct any errors in advance of loan shopping so they can work to get in the best possible position for better rates,” he says. They also know roughly what their credit scores are so they don't apply for credit products that they won't be approved for.
Many consumers today do not know what it's like to delay gratification, says Kingsbury. She recommends taking a page out of the 1950s, when folks would save up for months in order to buy a home appliance. “It sounds antiquated nowadays, but it's a good practice,” she says. Being smart about borrowing sometimes requires you to walk away even after a line of credit or loan is approved. If something in your gut tells you that you're in over your head, it's probably not the right time to borrow.
Kingsbury says you can start by having a conversation with your partner or family before you sign on the dotted line. Beyond that, for bigger borrowing decisions (such as a home equity loan or refinancing), consider speaking to an accountant, a financial adviser or a trusted person who is knowledgeable about the lending product you're pursuing.
Banks are competitive on mortgages, and credit cards are offering zero percent introductory rates. “We're back to a competitive environment in which consumers are able to shop around and find the best lender,” Bach says. He recommends going online to research your options, but also let your current lender compete for your business. Whether it's asking a card issuer to consider lowering your interest rate or getting a second opinion through a mortgage broker about a home loan, Bach says that being aggressive can pay off. “The person who negotiates is going to get a better deal,” he says.
“We tend to be extremely optimistic about our ability to pay our bills,” says Bach. That's why many people take “a little extra” when borrowing, or add bells and whistles onto a car even though it pushes an auto loan bill higher. That optimism is partially responsible for the real estate market collapse, in which borrowers were encouraged to go for larger loans than they could really afford.
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