Friday, December 3, 2010

When all else fails

There is an old German proverb that suggests: He who borrows sells his freedom. This is true in some respects. I remember growing up in a time when borrowing money and establishing credit in the process was the key to adulthood. It still is in many ways as your lives become entangled in the need for better-than-average credit scores. Credit scores have drifted into every corner of our financial lives, impacting not only the cost of our insurance but also finding your handling of your debt a precursor to getting a good paying job.

But unlike some of the borrower/sorrower quotes attributed to Benjamin Franklin, having access to money when you need it can often be just enough of a bridge to get you over short-term bumps in the road.

One of the most typical kinds of personal loans is used for home improvements. These loans are usually short-term (1-5 years) and often lent at a favorable rate (depending on the quality of your credit score). By simply proving you have a monthly income, are able to pay your bills on time and showing how you intend on using the money, these loans are relatively easy to get - even in today's economy. You might have to do your homework and possibly adjust how much you need based on your debt-to-income ratio. But of you have shown your financial accumen when it comes to using money - more specifically, other people's money, the process can often be relatively painless.

Less attractive is the emergency cash loan. These types of loans have been vilified in almost every corner of the lending market and with good reason. Most folks who use them are not as financially savvy as their cohorts with good credit, they often are not accustomed to turning to the bank or other lending institutions and because of this, are a much higher risk. But the fact remains, emergencies do and will happen. Whether you see this as a lender of last resort - and you should - depends on how the rest of your financial picture looks.

These types of loans are often incredibly short-term (as most emergencies tend to be). Someone considering them should have closely examined every avenue prior to committing to them. They need to understand that the only way these loans will work is to pay them off, in full, when they come due.

More than home improvements and emergencies, the vast majority will use borrowers to fund a break for the work-a-day world. Vacation loans are often based on your ability to pay (you must be working or receiving enough of a benefit package to pay the loan back) and can be quite tempting. This becomes a personal argument: how much do you need a break and how much are you willing to pay after-the-fact for the time away?

As with all loans, the key is to paying on time and perhaps even budgeting to pay a little towards the principal. In other words, the minimum payment the lender requires should not be the payment you are budgeting for when you decide to borrow the money. You need to budget for more. By paying some additional cash to the lender, earmarked for the principal, you will pay less in interest, be paid off sooner and be able to build a much more desirable credit score in the process.

Keep in mind, every borrowing opportunity needs to be carefully examined.

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