What Are Your Options For Borrowing Money in Today’s Economy?

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The following is a guest post. Enjoy! 

What Are Your Options For Borrowing Money in Today’s Economy?


Even in the current economic climate, there are still numerous ways of borrowing money when you need it. Your bank or other financial institution usually provides a range of personal lending options, such as an overdraft facility, loan, credit card, or mortgage, depending on your needs and financial situation.

Overdrafts


There are two main types of current accounts – a basic bank account or a standard bank account. Your bank will not allow an overdraft facility if you only have a basic bank account, as it is normally only offered to people with a bad credit rating. If you have a standard current account, then you can apply for an overdraft facility. Your bank, if it agrees to provide you with an overdraft facility, will allow you to go overdrawn up to a maximum level, either for a specific purpose or for use in case of need.

An overdraft is usually used for short-term borrowing requirements because the interest rate can be quite high.  And, if you remained overdrawn for an extended period of time, the interest payments could be considerable.

An example of when an overdraft could be suitable is when you need to pay for a holiday as soon as possible to secure a good deal and you are due a bonus in a few weeks time (i.e. you are certain that you can pay off the overdrawn money in a very short time period). To pay for the holiday, you could use your overdraft facility, and once your bonus is received, the money would be used to clear the overdraft. You would only pay a small amount of interest for the period that you were overdrawn.

Secured and/or Unsecured Personal Loans


If you wish to buy a car but do not have the funds to do so, you could take out a loan and repay it monthly over several years from your income at a monthly repayment figure that is affordable. Normally, you can expect the interest rate on a loan to be lower than that of an overdraft facility/account feature.

Credit Cards


A credit card is often used to buy an item that you do not have the money to pay for in one lump sum. The credit-card company will give you a spending limit that you can have on the card. You will be expected to make at least the minimum monthly repayments, which are based on a percentage of the amount outstanding.


Interest rates on credit cards tend to be higher than those for overdrafts and personal loans. If, however, you were to clear the full balance outstanding on your credit card by the due date, then no interest would be payable, which would make it cheaper than using your overdraft facility. If you make a cash withdrawal with a credit card, the interest rate is normally significantly higher than if you used your card at the retailer to buy an item. You also pay a cash handling charge to the credit-card company, which would not be the case if you took cash out of your bank account.


Mortgages


Normally a mortgage is used to buy a house, and you would then repay it over many years, usually 15-30. Interest rates on mortgages tend to be lower than other forms of lending (because of the security that home ownership represents and the payback probability), but because of the lengthy repayment term, the interest over 15-30 years can add up to a considerable sum.

However, some lenders will provide a further advance (probably in the form of a home equity loan) on a mortgage, for example to buy a car. The interest rate will be much lower than those for personal loans, so it can be a good alternative if you can repay it within a few years.

How about you all? What options do you currently or have you used in the past to borrow money? How was your experience with it? Did you have trouble paying off the balance in a timely fashion, or did it go pretty smoothly?


In your experience, has paying off debt been a bigger priority so far in life than saving for retirement? 


Share your experiences by commenting below!

Jacob’s Thoughts – Listed below are my random thoughts as I was reading this article.

  • Overall, even though I am not the biggest fan of borrowing money/being in debt, I am also a realist and believe that since many people are short on money these days with no emergency reserves, it’s important to fully understand your options of where to obtain money if you truly need it. 
  • Personally, here’s my “mantra” on borrowing money that I feel people should shoot for in their personal finances: only borrow money (and pay interest on that money) in order to invest in and/or build appreciating assets. 
    • What this means is that in general, I believe that people should only borrow money to either:
      • Invest in a businesses, and 
      • Invest in other assets that are able to increase in value over time. 
      • I would also say that borrowing money to go to a public university (NOT an unnecessarily expensive private college, which, in my opinion, doesn’t provide enough of a return on your money to make it worth the cost).
    • All other expenditures should be handled through periodic savings, not through debt. Several examples of things that should not be funded through high interest rate debt are as follows:
      • Vacations/holidays.
      • Cars (It’s now more complex to fully explain why car financing isn’t a perfect solution since many auto dealers are now offering 0% interest rate loans. As such, this will be the topic of a future post).
      • Furniture.
  • So, described above is how I believe people should shoot for operating their personal finances and borrowing activities long term. 
  • However, I’ve learned in my dealings these past two years with blog readers and my friends that a lot of people in today’s economy either a) are already saddled with credit card and student debt and/or b) simply do not make enough money to save periodically in order to buy cars, furniture, or take vacations. Essentially, they feel that taking on more debt is their only choice.
    • As you can imagine, in this case, things become more complicated. 
    • For some non-essential items like taking a vacation or buying furniture, there are options for spending much less money (taking a cheap vacation near-by or buying used furniture come to mind).
    • However, for things like medical care or having an automobile to drive to work, these are essential items that are very difficult to do without in today’s society. 
  • So, all of this is to say that even though borrowing money is not ideal, it is important to know your options so that you can find the best deal. Just keep in mind that borrowing money should not be considered as “normal” in your life. It is only something to use in specific circumstances or when absolutely needed. 

***Photo courtesy of http://images.cdn.fotopedia.com/flickr-3274955487-hd.jpg

Comments

  1. I can't see any good reason to go into debt, with the exception of the 3 that Jacob mentioned:
    Invest in a businesses
    Invest in other assets that are able to increase in value over time.
    To go to a public university

    I suppose for some people the mortgage debt makes sense as well as long as it is reasonable and paid off as quickly as possible.
    My recent post Sinking Funds for the Win(dfall)

    • Thanks for weighing in! For me, mortgage debt is an OK thing since the interest rate is reasonable and real estate is “supposed” to increase in value over the long term.
      My recent post Long Term Life Insurance

  2. I have a line of credit I could use.

  3. Busy Executive says:

    A big bank just recently announced they were ending the availability of cash out refinancing. If this trend continues, the ability to tap one's house equity for cash could be coming to an end. Another reason, with a current historically low mortgage rate, I'm not rushing to pay off my house! I like having the liquidity.
    My recent post My valuable credit card lesson

  4. We have sworn off credit cards, so if I was in a bind, I would probably try to borrow from a relative before borrowing from a credit card. In return, I would agree to pay the relative interest so it would hopefully be a good situation for both of us.
    My recent post How Do You Know When a House is Right for You?

  5. I have certainly borrowed money in the past in many of the forms you describe here. Today, my only ongoing debt is my mortgage. Your post points out that revolving and short term credit is debt too – good reminder. I use credit cards all the time (for most of my expenses) but pay them off each month. I also have overdraft protection on checking accounts, but it never gets used.

    As for your question of debt priority – yes. I am more focused on getting rid of my only remaining debt (my mortgage) than I have ever been. In fact, it was only last year that I made my first extra payment against my mortgage (after having mortgages since 1994).

    My recent post How to Create a Better Budget – Part 1

    • Thanks for sharing your experiences Jason! Paying off more of your mortgage is a great option in my opinion. The only word of caution I would throw out there is to just make sure that you are still funding your tax favored investment accounts before going too crazy in prepaying huge amounts of the mortgage.

      For example, what I like to do is set up a pretty aggressive biweekly mortgage payment schedule that enables me to get a little ahead on the the mortgage principal. However, since a house is an appreciating asset (so I don't consider it to be as bad of debt), I first make sure to fund my IRA and 401k before paying more mortgage principal. This is especially true is a 401k offers free matching.
      My recent post What Are Your Options For Borrowing Money in Today's Economy?

      • 401k is maxed but I need to up the IRA action. Thanks for the reminder!
        My recent post I am Joining the Yakezie Challenge

  6. I truly hope to never have to borrow money again. Once I sell my house or pay it off I will not have any debt. Well I have my kids but they are my legal debt… besides when I am old and grey I will make them take care of me for all the sleepless nights they force me into. 🙂
    My recent post Week In Review – Photography, Unromantic Valentine's Gifts & Saving Money Dining Out

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