Be in the Know: How to Purchase Properties Without Getting Into Deep Debt
Loans were created to help consumers build, purchase their dream properties, and allowed everyone to make their lives better and increase their value. But like a coin, it also has two faces. Without basic knowledge about proper management, you might get stuck in debt without you noticing.
With the current report about consumer debt rising to $14.3 trillion in 2020, it is only natural to feel like you’re not going to escape from that financial hot water soon (if you are part of the greater majority who have consumer debt, that is). However, it is still possible to get back that firm financial footing once again.
There are a few rules you need to follow to be a responsible borrower. Listed below are essential things you should know before deciding to borrow money for a property purchase and how not to go into deep debt.
Differentiating Good Debt vs. Bad Debt
Some might argue that there is no such thing as good debt. Yet, oftentimes, borrowing money or applying for a loan seems more reasonable and, undoubtedly, a justifiable means to purchase any property. Contrary to common belief, there is actually ‘good’ debt if you try to look at it from another perspective.
It is as simple as this: good debt is when it allows you to gain more profit. In short, you apply for a loan, and you use it to increase your net worth and generate income. Contrarily, bad debt is anything other than financial gain. Knowing this basic principle can help you be much wiser the next time you get a loan.
Applying for one need not be an “irritating inconvenience” on your part. Thanks to advancements in technology and the internet, loaning services are now available online. With this said, Personal Money Store can help you with your loan needs. Check their website here: https://personalmoneystore.com.
When Applying for Loans to Buy Properties
If you are preparing to apply for a loan to purchase properties, you have to remember to be S.M.A.R.T.:
S – Scores Matter
The first thing you have to monitor is your credit score. Be sure that your score reaches the minimum required by lending companies so that processing your loan will go smoothly. If you have good credit, you are sure to qualify for the loan.
On the other hand, if you have bad credit, you still don’t have to worry because there are, nevertheless, lending companies willing to work with you.
M – Monthly Obligations
If you plan to apply for a new loan, make sure that you can pay it together with your other monthly debt obligations (if you have). It is not a realistic strategy to apply if your debt-to-income ratio is off balance. Ideally, lenders would want to see your D.T.I. be no more than 36%.
A – Assets Minus Liabilities
Besides your D.T.I, lenders would also want to check your tangible net worth, or the total assets you own minus the total liabilities you owe. Knowing your net worth could also be beneficial for you as it allows you to know where your financial capabilities currently stand and a way for you to monitor your financial health.
R – Rates to Pay
Most of the time, you will have to pay a certain amount of interest rate when you apply for a loan. When it comes to interest rates, it is safer to choose a fixed rate than a variable. A variable rate loan is quite risky since market rates might increase rather than decline, and if you aren’t able to pay your obligations, it will further hurt your credit score.
T – Try to Maintain a Good Credit History
In general, having a good credit history will let your potential lenders know that you are capable and, therefore, eligible for the loan you wish to apply for. This can also serve as your ticket towards securing the most favorable terms out there. If you can do this, you’d definitely save tens of thousands over the life of the loan.
Avoiding Getting Into Deep Debt
Being S.M.A.R.T. sure is the cream of the crop when it comes to applying for loans. However, there are other things that you must also be aware of to avoid going deep into debt. In this case, remember your D.U.T.Y.
D – Develop a realistic budgeting strategy
Having a realistic budgeting strategy and changing spending habits could greatly help you manage your expenses well. Knowing how much money you take in and take out is an important first step to avoid getting into major debt troubles. Likewise, it could help you assess if you can still make ends meet or it’s time to get some help.
U – Utilize loaning opportunities wisely.
Applying for loans isn’t as tricky as compared to the past. In fact, many loaning services are not beyond your reach anymore, but even if this is the case, you still have to be a responsible borrower. Moreover, utilizing loaning opportunities also means that you have to strive hard to be in good debt.
T – Too long = Not Good
Although you don’t have to pay for a higher amount each month, the truth is, the longer the loan, the higher the amount of interest you are going to pay. If you try to calculate it, you will sometimes get a doubled rate. It is wiser to apply for a loan with reasonable loan terms so that you won’t get stuck in debt for years.
Y – You make payments on time
One way to avoid getting into deep debt and staining your credit report’s good name is to try and make payments on time. If you can’t, you test your negotiating skills because as long as your lender knows that you are acting in good faith and the situation is temporary, they can adjust to your situation.
Let’s face it: ever since loans have been introduced to the general public, it has increased the value, not to mention, the quality of life of everyone. True, it also has its negative side, but that’s mainly due to mismanagement, which can be developed correctly with proper knowledge and guidance. As long as you are in the know, you can surely master the art of loaning and avoid getting into bad debt.