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Four Ways to Become a Smarter Borrower

Updated on February 3, 2015

Advice on Personal Finance

Four Ways to Be a Smarter Borrower

1) Borrow for long-term goals, not short term pleasures. Try to take out loans only for purchases that will pay long term returns like a house, a home remodeling project, college education, or a car, and not for a better wardrobe or a European vacation. One useful rule of thumb: Never take out a loan that will last longer than what you are buying.

2) Apply for the shortest-term loan you can afford. Stretch to make the larger monthly payments that come with shortening a loans term. By doing so you will pay less interest over the life of the loan. Consider your choices for a twenty thousand dollar car loan at nine percent and a half point interest rate. If you select a five-year loan, you would pay just four hundred and twenty dollars per month, but spend five thousand two hundred dollars on interest, bringing your total payments to twenty five thousand two hundred dollars. Opt for a three year term, however and although your monthly payments will rise to about six hundred and forty dollars per month, in the end, you would just be paying around three thousand dollars in total interest or twenty three thousand dollars in total over a three year period. By biting the bullet and taking on the higher monthly payment, you could save over two thousand dollars in interest costs.

3) Pay as much as you can upfront. When you finance a purchase, put as much of a down payment as you possibly can, and do not go by lenders guidelines. Double or triple the minimum down payment required by the lender if possible. If you can make one or two large payments during the loans first months without incurring a pre-payment penalty then do it. This strategy is known as front-loading, and can save shave many months off your loans, and a bundle in interest costs over the life of the loan.

4) Try to avoid short-term high interest loans such as pawn loans, title loans, emergency loans from small finance companies, and especially credit cards. These loans though viable in emergency situations should at all costs be avoided as just pleasure loans to make needless purchases on a wham. These type of loans can get consumers in deep trouble if not careful. There are times when these loans are much needed, and can avoid a much more critical financial disaster, but if you do need to take this route, do so with a well structured payment plan to pay the loan off as quickly as possible, never utilize the loan options as being a long term solution.

Smart borrowing decisions can substantially help to better one financial strength buy use of better income flow, and an increase in valuable well invested assets. And always try to adhere to the age old adage, save your money for a rainy day.

Here are a few more articles on these subjects

Amortized Loan - Definition and Example (HubPages)
Atlanta Title Pawn


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