Taking a loan, especially mortgage loan, is an obligation that will influence our finances in the long run. Thus, any wrong decision can result in worsen financial health. Keep in mind that we all apply for some type of loan with the purpose to improve an aspect in our lives. Whether we apply for a loan to buy a car, to purchase a home, or maybe to consolidate our debt and improve our monthly budget, we do want to improve something. But very often borrowers are focused solely on the results to be achieved when taking a loan. This means that they are disregarding possible consequences. Meaning that sometimes borrowers do not understand how taking out a loan will affect their current financial situation as well as budget. This is especially true for first time borrowers. Because they don’t have experience with the psychological aspect of having a monthly obligation. Thus, as a first time borrower maybe you should consider whether you should save before borrowing.
The need to consider whether to save before borrowing can be perceived from two basic aspects. The first one is to see if in the foreseeable future you can save enough funds to cover your financial needs. This is to save instead to borrow money from a bank in order to cover the need.
The second aspect is the need to save before borrowing any in order to create a borrowers mentality. One of the biggest problem for first time borrowers is inadequate borrower mentality. This inadequacy is from a psychological and spending habits point of view.
One of the biggest problems for people who borrow money for the first time is that they do not have the habit of paying a monthly payment to their bank. This means that they could with a situation in which they are not prepared to pay a monthly payment on a regular basis. This in could lead toward worsen financial situation because of miscalculation or the need for changes in lifestyle to take place.
Imagine, that up to now you have had all of your income at your disposal expect for the everyday grocery bills, utility bills and for some the payment of rent. Aside of these monthly expenses your budget was consisted of everything that is left after paying these bills. So, you are living a certain life style with the income at your disposal. If this lifestyle included a monthly saving then it is great, if not, you should seriously prepare to adjust your lifestyle before taking out a loan.
Why do you need to make an adjustments in your lifestyle? The reason is rather simple. From the moment you take out a loan you will have a monthly obligation. Consequences from missing your monthly obligation can be felt in the years to come, for instance, your credit score. Getting into high level of debt is yet another problem you could encounter in terms of financial situation. Not only that you could end up with high level of debt, but also you could end up with higher cost to repay your debt.
For these reasons, it would be wise if you have proactive approach when it comes to your finances and the need to take out a loan sometimes in the future. You could have the opportunity to develop an adequate mentality and lifestyle to become responsible borrower. The best part is that you could stand to benefit even more. If you save before borrowing, you will end up with certain amount of savings accumulated on your account. Don’t forget that you have made the obligation to deposit portion of your income each month. Thus, you have adjusted your lifestyle in accordance to the level of budget you would have available after taking out a loan.
Banks in some countries offer a specifically designed products where you should save before you apply for a loan. Banks are offering products in which you should start by saving for a predetermined period of time. After this period you are eligible to apply for a loan (usually mortgage loan). Thus they ensure that you have overcome the psychological effect from sudden decrease in your disposable income because of the new financial obligation, i.e. the monthly payments.
But banks want to ensure that you will know how to handle your finances and a major advantages is that you will have certain level of savings to start with. For instance, you can use the accumulated savings as a down payment.
These types of products are generally aimed at clients who are entering the labor force. Keep in mind that you can apply for a loan the standard way when time comes. But when you decide to save before borrowing you can enjoy additional benefits. Aside of the above mentioned ones, you could also enjoy lower cost for your loan. This is due to the fact that banks could perceive you as a less risky client (by banks in some countries) because you are already prepared for your monthly payment.
Enjoying life when you are young should be a priority for sure, but you should not allow for this priority to hinder your life later on. Keep in mind that the possibility that you will need a loan later on in your life is rather high. Thus, your action early in your life can have adverse effect on your plans in the future. This is especially true when it comes to your financial health.
For this reason, train yourself to have the habit to save portion of your income each month. That is regardless of the income level you have (as long as you have income). This way you will end up with adjusted lifestyle as well as accumulated savings on your account.