When you borrow money, it is important for you to understand the difference between incurring necessary debt and unnecessary debt. When you borrow money to fund an essential item, this is considered necessary debt. These are items you need to function in your daily life, typically large ticket purchases that you would be unlikely to purchase outright with cash savings alone. These might include a home, car, medical expense or the like.
Unnecessary debt is usually assumed to finance items you don’t need to function or that you should be able to fund with cash if you were to save properly. This might include paying to eat out, buying groceries or shopping for clothes on your credit card.
Before you decide to borrow money, you should first decide if the item you need money for is a necessary item or if the item will cause you to live beyond your means, and then work to establish a budget to determine if you can afford the item. You should have a plan for how you will repay the loan to the lender. You’ll want to figure out how much money you’ll need to borrow and what your monthly payment on that loan will be. Then you should evaluate your income, minus other typical monthly expenses, to see if you can afford another monthly payment.
If you do need to borrow money, you should work with your lending institution to understand all fees, rates, etc. associated with the loan. It’s important for you to make room in your budget to accommodate the possibility of increased repayments throughout the life of the loan. Lastly, you should only borrow what you need, and no more.