Consumer debt reached $14.56 trillion after the fourth quarter of 2020. The problem is this:
- Most of the debts are expensive short-term personal loans;
- One third of debtors assume that they may not repay the debt in case of insolvency or problems;
- A quarter of people admit that they sign papers when applying for a loan even if they do not fully understand the terms and conditions.
People in the USA still do not know how to live on loan and because of this find themselves in a difficult situation.
How to borrow money correctly
A loan is a financial instrument, and you should know how you use it correctly. A person with a well-thought-out financial plan always makes payments on time, so he or she does not end up with fines, penalties and interest. Here the loan works as it should: it provides opportunities for the price the borrower is ready for.
Therefore, in order to borrow money correctly, you need:
1. Make a financial plan
A financial plan is the foundation of well-being. It works regardless of income level because it helps you understand:
- How much money you earn each month and how much you spend;
- Which cost items are required and which can be eliminated;
- What credit load you are ready for.
Example. Alex is a remote designer. His laptop is outdated and this interferes with the quality of his job. Alex looks at his financial plan and sees that he can pay $300 on a loan every month. He buys a new MacBook and makes orders faster. Alex earns more in a month.
Lead your plan in a notebook, Excel or smartphone – in a special app.
2. Set goals
They should be specific – with exact numbers and dates. Vague wording will only get in the way.
Example. Alex decided not to take out a loan for a new laptop, but to save. His goal is $1,700 by January 1 of the next year. This is a specific goal. It is easy to track, control and adjust. The goal of “saving up for a new laptop by next year” is not specific.
3. Balance assets and liabilities
Assets are what brings you money (wages, bank deposit). Liabilities are what takes it away (loans). In a healthy budget, assets bring in more than liabilities are taken away. Here you need to ask yourself:
- Are all my expenses necessary?
- How can I save money?
- Are there any spontaneous purchases?
- How can I increase the return on assets?
- How can I reduce expenses from liabilities?
Some liabilities are not obvious because they do not directly increase costs. For example, money under the pillow is a liability. Under the influence of inflation, they become cheaper. It would be better to keep them in a bank or invest.
Example. Alex bought or borrowed a new MacBook. The old computer is idle. It can be sold and reimbursed. But Alex doesn’t. He received a liability, because the computer is gradually becoming cheaper and obsolete.
4. Match opportunities with goals
When you figured out your budget and set goals, see how realistic it is to fulfill them. If you have only $100 a month free, you should not take out a $7,000 car loan for 3 years. You will not have enough money for the monthly repayment.
If you can’t compare goals and opportunities, you need to refuse the loan. You will have to learn to live without loans and save for purchases.
How to borrow money from a bank
Be sure to read the loan agreement before signing it. Find out all the incomprehensible and controversial points. Do not hurry. By law, you have at least five business days to review the terms. Take your contract home and re-schedule an appointment with a bank advisor.
You should know for sure:
- Amount of credit or credit limit for credit cards;
- The term of the agreement, the term of the loan repayment;
- The interest rate on the loan in percent per annum. The total cost of the loan must be specified on the first page of the agreement;
- The number, size and timing of payments under the agreement (payment schedule);
- Methods of loan repayment;
- Reasons for charging penalties, fines and penalties.
Common reasons for bank loan rejection and how to avoid them
- Bad credit history. If the borrower had a lot of delays or stopped paying the loan altogether, any bank begins to act more cautiously: it either refuses or approves the application but with more stringent conditions. In order not to lose your reputation and maintain a good credit history, correlate your income and monthly loan payment. If you see that you cannot pay it regularly, it is better to give up such a debt and borrow money from friends or relatives;
- Age and seniority. Some banks reject too young or old clients. The reason is the financial instability of people in these categories. Young people are mobile, easily change jobs, and pensioners are not well-off enough to bear a stable debt load;
- No official job. This is one of the main criteria. Official work confirms the solvency and financial stability of the borrower. The status of an individual entrepreneur is not so convincing. There is a high risk of dismissal or non-payment of the loan due to lack of income;
- Other loans and debts. The bank or a microfinance organization will decline you for a loan if they consider the client’s debt burden too strong. The organization wants to be sure that the money with interest will be repaid on time without additional measures. Therefore, you should close payments on other loans on time, plan their repayment so that they do not overlap. You also need to keep track of debts on housing and communal services or traffic fines – they can also become a reason for rejection;
- Non-US citizenship. Lending to US citizens is more reliable from a legal point of view. If there are problems, the company has more instruments to collect. Nevertheless, it is still possible to take out a loan without being a US citizen if you agree to more stringent conditions;
- Conviction. Banks and microfinance organizations consider convicted people to be unreliable. But this is not the key factor. When everything is ok with the rest of the solvency criteria, the application will most likely be approved;
- Addiction. If the biography reflects alcohol or drug addiction, the bank doubts the reliability of the borrower. This is an important but not a critical factor: it is quite possible to get a loan with a good credit history, permanent job and property.
How to get a loan with no paperwork and checks
It is impossible to get a loan without documents and credit checks at all – at least you need an SSN. You have the following options:
- Contact a microfinance organization. Almost all microfinance organizations provide loans with only one document. It is difficult to get more than $1,000 for the first time, but you can increase the limit by regularly repaying loans;
- Borrow from an individual. It is possible to set conditions and a repayment schedule that banks or microfinance organizations will not agree to. The main thing is to draw up a receipt correctly;
- Use a credit card instead of a personal loan. With cards, most banks allow you to withdraw cash or pay the necessary expenses with an interest-free period. This means that you can use the money for free – do not pay interest on the loan for a while.
How to borrow money against a receipt
A receipt is a document. It confirms that one person lent another loan on specific terms. Even if you are taking a large amount from a relative or friend, draw up a receipt. This is the basis for both sides. In case of disagreement, it will be repelled in court. When there is a receipt, the testimony of the witnesses is valid.
The receipt is written by the one who borrows. This excludes document forgery. For safety, invite witnesses. But they do not bear any responsibility for the transaction.
Before borrowing from a private person, do this:
- Compare the loan with the financial plan;
- Agree on the terms of the debt, the procedure for repayment;
- Write a receipt and check the conditions;
- When you have repaid the debt, ask for a receipt that the conditions have been met and the creditor has no claims against you.
How to borrow money without a receipt
You’d better not to. Loans without a receipt have no legal effect. In such a situation, the lender may abuse the position. Threaten, change conditions, charge extra interest. It will be difficult to defend yourself under the law.
The receipt is beneficial for everyone. It guarantees that you have taken a specific amount, for a specific period and with precise conditions. And if there are problems, it will help to solve them according to the law.
How to repay debt correctly
The general rule is simple – you have to pay according to the repayment schedule. Avoid delays – lenders charge fines and commissions for them. Re-read the agreement (or receipt) periodically so as not to forget about the conditions.
When you have completely repaid the loan, ask the lender for a document confirming the loan repayment. This applies to both banks and private traders.
In some cases, the lender may not close the account and continue to service it and take a fee for this. In this case, the debt is growing, and the borrower does not know about it and receives a request from the bank to pay off the debt in a few months.
If the loan is issued with a guarantee, then both the borrower and the guarantor must receive a certificate from the bank about the agreement termination.
What to do if you cannot repay the loan
Don’t be afraid of collectors
If it comes to collecting debts through collection services, do not panic. The work of such companies is regulated by law.
Restructure and refinance
Restructuring is when the current lender meets the borrower halfway and changes the terms of the loan. So you can increase the term, reduce the monthly payment and achieve other changes.
Example. Mary took out a car loan for $7,000. A year later, she lost her job and found a job with a lower salary. She wrote a statement to the bank, explained her position. The bank agreed to reduce the payment by 15%.
Refinancing is when a borrower takes out a new loan from another bank to pay off the old one. The benefit is obtained by reducing the interest rate.
Bankruptcy (last resort)
An individual is declared bankrupt under the guidance of a financial manager. Such services are expensive. There is a minimum established by law. Check up with your state regulations.
There are many disadvantages, for example, you cannot be an entrepreneur or hold leadership positions.
Keep in mind that not any person can initiate bankruptcy:
The bankruptcy decision is made by the court. They first check if the debt can be restructured. If yes – they draw up a repayment plan. If not, the person is declared bankrupt with the sale of the property. There is a property that cannot be seized and sold.