Part of good financial planning is the ability to carefully consider what you borrow: how much you borrow, and why you do it. Indeed, it is important to borrow smart these days. The subprime lending crash brought into sharp relief that there bad borrowing decisions are a problem, and that there are plenty of lenders prepared to support the bad borrowers. The important thing is to avoid becoming a bad borrower.
When you borrow smart, you think about the consequences of your actions. You know that there is such a thing as “good debt,” but even that goes bad if you get carried away. One’s home is a perfect (and timely) example. Just because a bank says they will lend you a certain amount of money, it doesn’t mean you should borrow. Carefully consider ALL of the costs of this decision. How will the monthly payment affect the rest of your financial life and goals? Also, remember that just using a mortgage calculator won’t help you figure taxes and insurance, which are usually included in the loan.
The same rule applies to buying cars and using credit cards. You want to be sure that you have ample money to make payments (in the case of a credit card, try to avoid carrying a balance). When you borrow smart, you also consider your true needs. Sure a flashy brand-new car might be great, but do you need it? My friend recently bought a huge new SUV. She has four kids, but the less expensive minivan would have answered her needs just fine. Seating and cargo room are similar on both vehicles, but the minivan cost more than $8,500 less. Now she doesn’t have enough money for other things.
When making your borrowing decisions, make sure you consider carefully. Interest is ruthless, and the more you borrow, the more you pay.