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At some point in your life, you’re probably going to have to borrow money be it for a house or something else. But before you do, you should carefully consider your financial situation. Borrowing money can get expensive. Here’s what to consider:
We live in a culture where borrowing money is the norm. People do it all the time. It seems like the right way to organize your finances.
However, you should think carefully about whether it will improve your life. Just because everyone else is doing it, doesn’t mean that you should too.
Ask yourself whether buying something that costs a lot of money will substantially improve your ability to live and enjoy your life. Sometimes when you consider it deeply, you’ll conclude that it is worth borrowing money from somebody else, but not always.
When it comes to borrowing, paperwork is important. Both parties need to know where they stand.
If you don’t have good paperwork, you can download a free promissory note template. This offers prompts for all the legally-required sections you need to include in any agreement with somebody else.
If you’re borrowing from friends and family, it can put a strain on your relationship with them, particularly if you find that you can’t actually pay them back.
Most lenders you know will offer you a lower rate than the going market rate. This automatically puts them at a disadvantage because it probably isn’t a true reflection of the risk you pose.
Before you borrow money, therefore, consider how it might affect your relationships with others. Again, think about whether you need the money so much that you need to borrow from them rather than through the regular channels.
Clearing a backlog of debt can take a long time. For that reason, many people who borrow can wind up feeling stuck in their situation. Month after month, you have to pay back your creditors. It can take a long long time.
Some people can mentally deal with financial situations like these. They just accept them as a part of life. But other people don’t like them at all. In fact, it can be a major reason for mental health problems.
The only way you know whether you should go into debt is to ask yourself whether you have the temperament to deal with it. If you don’t, then steer clear.
You have control over most of your expenses. But you must repay the creditor every month according to a schedule. There are no exceptions.
Because of this setup, your overall budget will be less flexible. You’ll be less able to ramp up spending in some months, and pare it back in others. Some of your income will automatically go to paying back your creditors.
In summary, borrowing money isn’t necessarily a bad thing. But you must consider the pros as well as the cons.
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