Loans from local money lenders can be a good thing if used properly. Unfortunately, most people are not aware of how to make loans work for them. In turn, they incur debt that can balloon out of control.
Part of why this happens is misconceptions and wrong expectations about loans. What causes these wrong expectations? Below are five of those causes.
Inadequate financial education
If you are not educated in the principles of personal finance, you will most likely have the wrong notions of debt. More often than not, this lack of knowledge will lead you down a path of financial disappointment.
To avoid this, educate yourself about budgeting, saving, investing, and debt. In particular, know the difference between good and bad debts. Debt can benefit you if you use it the right way. For instance, if you take out a loan to purchase an asset, it will earn money for a long time. You can even use the income from the asset to pay off the loan. After that, the asset will continue to earn money for you.
High-pressure sales tactics
Many lending institutions resort to high-pressure selling to get more people to take out loans. If your budget allows you to take out a loan and repay it on time, it doesn’t mean it’s always a good idea to take out that loan.
Even if you know that, though, high-pressure selling can still make you give in. The lender would make it look like the loan isn’t that bad. They’ll get you to focus on what you can get out of the loan. But what they don’t tell you is the cost of it – interest, monthly repayments, and some lenders even slap you with hidden charges.
Don’t fall for high-pressure selling. If you know something is up with a loan product being offered to you, trust your instincts. You are not obliged to say yes to lenders.
Peer pressure and social media
When you see your friends and family on social media flaunting the newest stuff they have, there will always be a feeling of envy. You’d want what they have, even if you can’t afford them yet. So, you take out loans to buy those things. Then, you end up in debt for something you don’t even need.
To avoid this, keep in mind that you do not have to keep up with your peers. If you want what they have but cannot afford it, hold off. Keep living below your means. If you want what your friends have, save money so you can afford it later on.
Unclear loan terms
All loan products are required by law to state their terms and conditions. But some lenders intentionally hide their terms behind obscure language. Not only that, but their contracts are unnecessarily long and the font sizes are ridiculously small that they become hard to read.
Thus, if the loan terms are unclear because of all the legalese, taking out a loan from that lender is not the best idea. Find another lender and a loan product whose terms you can fully understand.
Lack of financial planning
Financial planning includes things like budgeting, saving, investing, and the like. Creating a budget is particularly important because it lets you control every aspect of your finances. You get to control the flow of every single dollar. That means you would know exactly where your money is going.
Without a budget, it’s much easier to run out of money for your needs. And if needs arise, you will not have the money for them. As a consequence, you will have to take out loans to cover those needs. And using loans to finance your needs is not a good idea.
Conclusion
Your expectations about debt will influence how you treat loans, credit cards, and other credit products. If you have misconceptions about debt, you will most likely have problems with it. But with the right expectations, you will be able to use debt more wisely.
