We all know that debt is forbidden; it spoils credit score, financial health, and mental peace. This is why most of you either try to get out of the debt trouble fast or avoid further debt.
Staying debt free can be difficult; you may have to take on new debt for a valid reason. For example, buying a car, a home, renovating the damaged part of your home, or considering relocation, etc.
# Should you take out a new loan for a large purchase?
Often people who struggled quite a bit to build their credit become confused before making a decision of taking out a new loan.
Because, after a long time they have successfully build a good credit score.
They don’t want to lose the score by taking out a new loan.
The dilemma is justified. But staying away from debt is also difficult especially when living cost is skyrocketing.
If you are one of them who are confused whether or not to safeguard your credit score or take on new debt to make a large purchase, then read the entire article to get the answers of your dilemma.
Is it better to use your savings instead of taking out a new loan?
Taking out a new loan is okay, but you shouldn't miss a single payment. It will hurt your credit score. Thus, making large purchases with cash can be a good idea.
5 Ways to save money to make a large purchase without taking on new debt
Except buying a home, you can make other large purchases (Buying a car, renovating the home, planning a vacation, considering relocation) by saving enough money.
Well, you can even purchase a home with cash, but it can take quite a long time for it.
However, you have to make the monthly payments on time. Otherwise, you may fall into mortgage debt.
But taking out a personal loan or payday loan may not be the solution because the interest rates are relatively higher.
Also, you have to repay the payday loan with your next paycheck. If you don’t pay back, you will start accumulating high-interest payments on your loan.
So, to buy some large items, say for example a car, you should try to save more money instead of taking on new debt.
Here’s how to save for a big purchase:1 Set a deadline
We often set a deadline to achieve a goal; we should follow the same thing when we plan to purchase a large item.
For example, if you want to buy a car, then you should set the deadline and start saving accordingly.
2 Break down the goal by month
Once you set the deadline, you need to pay attention to your monthly spending. Review your budget to find out unnecessary expenses and eliminate them.
Budgeting is the key; it will save you a certain amount each month so that you can make the large purchase when you want.
3 Automate
Automating the savings helps to avoid spending on unnecessary things.
It will help you to set aside money for a large purchase.
4 Consider a side hustle
You have to increase your savings to buy the item.
If your current income is not enough to set aside a portion of it every month, then try to earn some extra money.
5 Keep patience
Saving money for a large purchase can be difficult; there are days when you would like to do something else with your money.
Some important questions to ask before applying for a loan
It is quite normal to feel nervous or anxious before borrowing a new loan.
So, it is advisable to think about whether or not you really need to borrow a new loan. Justify your decision by asking some questions to yourself; it will reduce your anxiety.
It will also help you to understand whether or not you are ready to take on a new financial responsibility.
Here you go:
1 How much should I borrow for a large purchase?
Don’t borrow money based on your assumption. Determine how much do you need to make a large purchase?
Some lenders can force you to take out more than you actually need.
So, calculate at your end to decide the loan amount before applying.
2 How much should I pay every month for the loan?
Determining the loan amount is not enough; you need to decide the amount you have to pay each month.
Thus, calculate how much will you need to pay for your loan?
To do so, revisit your budget and check how much you can afford.
You need to reduce some unnecessary expenses or increase current income to set the new expenses in your budget.
You will get many type of calculators like personal loan calculator, car loan calculator, simple loan calculator, etc. available online. Most of them are easy to use and free of cost.
3 Am I getting the best loan term and interest?
Shopping around is not just for clothes, shoes, gadgets, or vehicle; you can shop around to compare the price for your loan as well.
4 Does the new loan damage my credit score?
Remember, once you apply for a loan, the lender will review your credit score, which will be considered a hard inquiry.
However, multiple hard inquiries placed within 45 days are considered as 1 hard inquiry.
In addition to this, before approving you the loan, the lender will check your DTI ratio (Debt-to-income ratio), which means your affordability of managing a new loan.
If the DTI is high, you may not get a new loan or better term on the new loan. You can use a debt-to-income ratio calculator to check your financial health.
Lastly, if you purchase the item using your credit card, then you have to pay the amount in full and within time.
5 Can I wait until I save enough to get the item?
Ask yourself to decide the time when you need to buy the item. Try to avoid a rash decision about making a purchase.
6 Is there any option to make a large purchase without borrowing?
This question is vital because we often consider the easy option without thinking the long-term effect.
Before signing to a new loan, find out other options that can be more beneficial for you. For example, selling some unused items to earn some extra money, taking out a loan with no or less interest from a family member or friends, using savings, using tax refund, and not buying at all.
Lastly, don’t accumulate further debt by making a disastrous financial decision.
Remember, further debts are the added financial responsibilities that you have to manage properly.
So, it is better to avoid the trap of large borrowing because you might not be financially prepared to manage the debts.
