Being debt free or at least keeping it to a minimum can be a challenge but not impossible. With a little patience, discipline and perseverance you can make it happen. In order to reach the goal of never BORROWING again, you must first understand what a debt really is. Individuals have in one way or another filed for a PERSONAL LOAN or any other type of loan for that matter but most of them do not really know the various types of debt that we are up against thereby not really understanding how it will affect their financial lives. Most people think that all debts are the same but the fact is they all differ in value, cost and risk.
Secured and Unsecured Debt
When a getting a loan from traditional lenders such as a bank, the loan system that they offer is usually categorized into two namely secured and unsecured. Secured loans are known to carry collateral against the loan. This is a low risk transaction in favor of the bank considering that they have a security tied to the loan. The collateral is usually in form of an asset such as properties or anything else of value to the borrower. Unsecured debts on the other hand do not require any collateral. However they incur a higher degree of interest as compared to secured debt. Aside from these two other common types of debt are Credit card debt; Personal loans; student loans; mortgages; auto loans and payday loans.
Good and Bad Debt
We all know the old adage that say “there is always two sides to a coin”. The same rule also applies to all types of debt. There is what we refer to as good and bad debt. Good debt refers to any kind of loan that carries values and examples of this are home mortgages, educational and real estate loans. They are indeed loans but can also be considered as investments. Bad loans on the other hand do not create value over time. Examples of this are car loans and credit card.
There is really no way by which an individual can avoid BORROWING money. In today’s developing fast paced world, unexpected expenses such as medical procedures and educational cost are inevitable. This situation forces an individual to have no other recourse but to file for PERSONAL LOAN or any other loan in order to resolve the financial predicament that he is in. Loans are a part of life today but you should never be fully dependent on it when a financial calamity comes your way. The best solution to minimize CREDIT is to prepare yourself for any financial eventualities that may come your way. And how do you do this? The answer to this question is simply proper management of your personal finances.
Efficiently Managing Your Personal Finances
The first thing to do when managing your personal finances efficiently and effectively is to analyze, study and assess realistically the ratio of your income and expenses. You can do this by listing all of your gross monthly income along with your fixed and variable expenses. Make sure you are able to prioritize your expenses according to its nature. Household, medical, educational should be on the top of your list. The rest of the expenses can be treated as variable thereby allowing you to see where you can cut down without sacrificing those expenses which you have prioritized. You can now analyze the ratio between your income and expenses. If your variable expenses extremely exceed your priority expense, you can now easily pinpoint where you can cut down. Most people do not really see the many unnecessary expenses that they commit. Most of these comes from recreational and entertainment expense. You will discover that cutting down on this will leave you a sizable amount of surplus which you can use when a financial crisis comes your way. Once you’ve realized your surplus make sure that it is placed on some kind of investment that would yield good return. Putting your money on high yielding investment may put it at risk so just be satisfied with getting a reasonable amount of profit from small but more secure investment.
For people whose credit ratings are below average but who are in dire need of immediate cash to finance their real estate needs can approach alternative lenders for their money problems. However, for sizable loan amount, BORROWING from payday lenders and other small but private financing group may not be viable. In the CREDIT world today, there is such a thing called hard money loan. What is hard money loan? According to the website INVESTOPEDIA, “hard money loan is a form of a short term bridge loan where the amount concerned is secured by the value of the collateral or property and not by credit worthiness of the borrower”. Since the collateral is being used to secure the loan the borrower can only get an amount way lower than the value of the property being used as collateral for the loan. This condition is referred to as “lower loan-to-value ratios or LTV. This is quite the opposite when you secure a loan with traditional lenders. Hard Money loans levies higher interest than those that you can get from traditional loans. Also hard money lenders are usually facilitated by private individuals or groups that see the value in investing in this kind of lending system.
Advantages & disadvantages of Hard Money loans
Accessibility is one of the main advantages of hard money loan considering that their requirement is not as strict as that of the traditional lenders. Loans are approved much faster with very little documentation to present. Hard money lenders accept any valuable asset or property to cover the loan and allow the borrower to get as much as 75% of the secured property value. They are more flexible in their loan offer as compared to conventional lenders such as the bank. On the other hand the high interest rate and processing fees for the loan can be considered as its main disadvantage. Also, unlike banks and other conventional lenders the loan-to-value or LTV offered by hard money lenders are much lower thereby increasing the risk that in the event of a default, the borrower tends to lose a lot more that what he has received.
You may think that BORROWING money may now be an impossibility just because your credit rating have dropped and that lenders consider you now a bad credit risk. This may be true if the PERSONAL LOAN or any other loan that you plan to avail would come from conventional or conservative lending institutions such as a bank. Today, there are alternative lenders that would be more than willing to lend you cash regardless of your credit standing in the community. Being tagged as a bad credit risk does not necessarily mean that you are already incapable of repaying your debt. As a matter of fact record shows that only a few percentages of those with bad credit risk are actually incapable of facing their debt responsibilities. The rest are actually just tagged as such but have the capability of paying off what they owe. An Alternative MONEY LENDER who usually caters to borrowers with bad credit rating is not concerned on how high the former’s CREDIT score is. They are more interested on the regularity of the borrowers’ income and how much money they earn in a month. Once this is established, these lenders easily approve the borrowers’ loan application.
Terms of Payment
Once you’ve finally gotten your loan, you may negotiate with the lender on how to go about paying off the debt. For most alternative lenders, they offer two ways by which you can settle. First is paying it off in lump sum or having the loan amortized for a few weeks or months. If you feel your income can absorb paying off the debt in one lump sum then do so. This will be more advantageous considering that you would have less interest to pay. But if your budget will not allow it, negotiate with the lender on allowing you pay the same in installment. However you should realize that if the lender do agree to your request expect a short term loan payment scheme and be aware that the interest would be higher than if you would have paid the debt in lump sum.
CREDIT or BORROWING money can sometime be construed as a necessary evil. This may be true for individuals but in general we all know that even the largest and richest country in the world rely on credit to run and make their economy grow. For a person borrowing money, this can be more of a problem if not used properly. For an individual, filing for a loan may be hazardous to one’s financial health but today we simply cannot avoid doing business, especially purchases by credit and the use of credit card is a very good example. We have to face that gone are the days when purely cash transactions are the only way to do business. Now, you have to use some form of credit to some transactions and credit card is one of the ways to do it.
The Easiest Form of Credit Facility
Almost everyone who has a job or regular income will have some kind of access to some form of credit facility and the Credit is perhaps the easiest one to use. This can be used to make purchases without the benefit using cash. Since credit cards are can be access by almost anybody who has an income, it provides some flexibility to the owner making it easy for him to repay the debt that the card has incurred. For instance, there is the “grace period” payment scheme; deferred payment scheme which gives the card user a few weeks or month before the purchase is reflected on the bill and the most convenient of all is conversion of purchases to be paid in installment.
A Word of Caution
The main problem of having a credit card is that one can easily abuse its purchasing power. This is where you get into a financial dilemma. Remember that credit card companies purposely put a high limit on credit so as to encourage use. This is where your discipline comes in. Make sure that you should only use the card only in an utmost necessity and if possible pay the whole balance of the card at month’s end.