What is the Correct Amount of Debt for You?
By Daily Dosh | January 11, 2008
Each and every one of has is in a different financial situation so there is no definable “correct” amount of debt. Luckily there are a few guidelines for those who may be unsure.
Lenders are Taking a Risk - Lending companies will lend you as much as they think you can afford. Yes, they are taking a risk in doing this, however these are calculated risks. They will look at your current and past finances such as how often you have defaulted on a loan, current interest rates along with your credit history. If you want to take out a loan you need to understand what the banks want from you.
Can You Really Afford the Repayments? Don’t rush into taking out a loan and make sure that you can really afford to make the repayments. If you know that you can’t afford the repayments don’t take out the loan! It’s not worth the hassle even although you may think so now.
If you are expecting an increase in income then you can certainly factor this into your decision. However make absolutely sure before signing any contracts.
Look at Interest Rate Trends - Don’t worry, this is not as difficult as it may seem as general trends are not that random. Bonds, futures and other indicators can also help. If you see 6% bond option prices going down then it may be that interest rates will rise. This is what professionals look at when working out future interest rates.
Check Credit History – Try and look at yourself the way a bank would. Do you honestly think that they would lend you any money? The bank doesn’t care why you were late in paying – they just care that you were late. They see everything in black and white.
Income v Expenses - Write down all you income and expenses in order to work out what is realistic. You might long for that Hawaiian cruise but can you afford to pay out every month for the next year? It’s important you are completely honest with yourself.
Think for Yourself - Bank staff are not there to tell you whether you need that item you’ve had your eye on. Think about if you would rather wait whilst you save for the money rather than paying high interest rates.
Impulse is one of the biggest culprits of debt. Before rushing out and buying what ever it is you want, think to yourself “do I really need this debt?”