At this current time in our economy, it seems that nobody lives in a debt-free zone. Most of us either own a credit card which we use to purchase our daily needs, or we apply for loans to pay for our homes, our car or our children’s education. However, people tend to acquire uncontrollable debt which is far out of their reach.
Many experts claim that the ideal long-term debt payments per month should be lower than 36 percent of your gross monthly income. This percentage also serves as reference for mortgage bankers in measuring the creditworthiness of a loan applicant.
Most of us are enticed in the easiness of swiping our credit card for our purchases leading us to spend more than what we should. The average household in the United States has about $10,700 in outstanding credit card balance. During the recent years, personal bankruptcies also soared up along with the foreclosures.
Though, no one recommends not having any debt at all. It is not advisable to exhaust all your liquid assets, especially your cash which should be reserved for emergencies. It is only a matter of knowing or prioritizing which debt is rational and which is not. Then, manage your finances wisely and draw a budget and payment schedule accordingly.
Debts are considered good when you use the money in a necessity but you cannot afford to pay in cash. Before considering a loan, check whether the payment scheme is within your paying capacity.
Debts incurred from acquiring things that you don’t need and can’t afford, a luxury car for example is considered a bad debt. Credit card debt is one of the worst forms of debt because of the high interest it bears.
Your borrowing decision may depend on the returns that your money could bring compared to the amount of interest that you have to pay on your loan. In the event that interest rates are lower than what you can gain, considering a loan at a lower rate may be a better decision.