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Smart-Alec's© Advice on Loan Planning |
When you consider a loan you are going to enter into a contract to borrow money in order to buy something you want.
One of the first things to consider in loan planning is: "How much is the loan going to cost me over time?" When we see something we want it is all too easy to just get the credit and buy the thing. But then comes the payments, and payments and payments, and on and on. Sometimes we can even continue to pay for something we no longer have! The cost of credit is high, especially in the consumer credit world. Credit card companies are all over the place and many people have more than one credit card, with the majority of them being completely maxed out. If you are like a lot of people you make only the minimum monthly payment. That's great, you make you bill payment each month, but you also make the credit card company very rich in the process.
For instance, if you buy an item worth $2,000 at the going interest rate for consumer loans (usually 21% or more!), and make just the minimum monthly payment the entire loan will cost you $3,246. to pay back. That's the $2000 plus $1,246 over the time of the loan. Ah, if life were so easy. The fact of the matter is that credit card companies milk you for everything they can get over the course of the loan (hey, after all they are in it for the money don't ya know!). For an example, for a loan of $2,000 the card company will send you a bill with a "minimum" payment required. This is the smallest amount before the amount of the financing. For instance the minimum payment on a $2000. loan at 21% will be about $40.00. That's great, except that the interest rate would create a finance charge of $35.00! That leaves $5.00 to go to the principle of the loan.
Now not all credit rates are this high, although some credit rates that are out of this world topping 23%! Even those which promise an introductory rate (3%-9%), can turn out to be a ball and chain because if you read the fine print you will see that if you miss a payment or even get late with a couple of payments, the rate can rise as high as 24%. My advice is to stay away from credit cards unless you can discipline yourself to pay off what you charge every month. Unless you can, don't get one. But if you do get one, get one with a low limit (anything under $1,000), and then make the highest payment you can every month.
If you are considering a loan for a high dollar item such as appliance, then a bank or consumer lender is your best shot. I cannot recommend department store credit cards, the interest rates are unbelievable and the quality of what you end up getting is usually less than worth it considering when you add the price of the item plus the price of the credit.
Now, lets get back to the subject at hand. Once you have assessed the cost of the loan you want, you then want to look at your household budget to see if you are going to be able to afford the payment. What? You don't have a budget? Well you had better. Running a business without a budget would be a disaster, and it is no different with a household. You have money coming in, money going out, and like in a business there needs to be an accounting. Lots of people get over extended in their credit precisely because of this reason. If you don't know how much income you have after present expenses then you will have no idea how a future payment will affect your whole bottom line.
Once you have weighed the impact of the loan, the idea is to figure how much to set aside each month for the quickest way to get the loan paid off. Remember, you don't want to make just the minimum payment, you want to pay the loan off while you still have the item you bought.
As you can see there is much to consider. That new stereo or computer might be the thing you must have now to survive. But considering these few points I have outlined here might make you think again, or twice.
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Copyright 2000, Hubbynet. Material presented here is for information purposes only. Real estate laws change state to state. As with any financial decision contact your attorney or a financial adviser. Hubbynet is not responsible for misprints although we have done all things possible to make sure the information is accurate and as current as possible.