Are you borrowing too much?

We are very lucky these days to have access to cheap money. Some of us will remember home loans priced at 18% p.a. and car loans at 20% plus. That said, it is important to maintain your wits about you when deciding to take on any additional debt. It does not matter that rates are low, you still need to be able to afford loan principal repayments and can not make affordability decisions on rate alone. Those who over stretch their family budget, too often find that a small unexpected event can bring on their undoing.

Personal Loans

When it comes to personal loans we always say ‘why’?

Personal loans are generally taken for reasons that help the borrower obtain access to lifestyle advantages that they are otherwise unable to obtain because of a lack of savings. The funds borrowed are often applied to a holiday, a wedding, new furniture, or anything else wants to have now and pay-off later. We do not support this type of borrowing as it does not make financial sense to borrow and pay interest on lifestyle expenses. It does not matter if the debt is small or large, it is best to be avoided.

The only exception here, is personal loans for essential medical procedures, or possibly consolidation of otherwise unaffordable debts.

Car Loans

Cars are an essential asset for most of us but they are a depreciating asset.  That means that the longer you own a car, the more value it drops.

Cars allow us to get to our place of employment, bring home food, and drive our children to school as well as other family activities. However they can also be a financial drain on the family budget especially if the vehicle we buy is unreliable and requires constant repair or is a beautiful new car the repayments for which the borrower can barely afford.

Some of you may only be able to afford a vehicle that costs $3000 while others can easily purchase a luxury car. What is important is to remember that your car is a depreciating asset. That means it looses value every year that you own it. While a vehicle bought in the range of $3000 – $10,000 will have very little to loose, and may only drop a few hundred dollars a year, a car that was bought for $65,000 can easily loose $15,000 a year in value and so on.

It always saddens us to see people overstretch to purchase a car of their dreams to only find at the end of the finance period, that the vehicle is not even worth the money that is still owed on it to the finance company.

Be very careful with new car loans. Do not focus on the interest rate alone. Ask yourself if you can afford to lose thousands, or tens of thousands of dollars annually, before buying a new vehicle. Make sure that you are happy to own the vehicle and the debt that remains on it after several years of new car ownership.

Credit Cards

There is nothing wrong with credit cards as long as they are used for short term borrowing only – ie. no more than the interest free 55 day period which is offered with most credit cards. It does not matter what interest your card provider charges if you never intend to carry forward any debt and pay off all purchases in the first 55 days.

Credit cards are not a personal loan and should not be used to accumulate personal debt.

Property Loans

Property can be a growth asset and that is why it is deemed acceptable to borrow large sums of money when purchasing a home or an investment property. However not all property is an equally good investment. Therefore it is crucial to find a low cost lender who offers a flexible mortgage. Do try to save a good deposit as this will allow you to borrow less and make the loan repayments more affordable.

Many people make the mistake of borrowing more than they can afford just to enable them to purchase in a suburb of their choice. Do not overextend. It can be a smarter choice to rent for some time where you prefer to live, and buy an investment in a more affordable suburb. This will offer you the best of both worlds and assist in keeping borrowings at a manageable level.

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