How to Avoid Falling into a Perpetual Borrowing Situation

Having to deal with a loan is bad enough on its own. But when you constantly keep finding yourself borrowing again and again, this is indicative of a bigger problem. It’s not always easy to identify what’s wrong in those situations – especially if you’re not very experienced with money yourself. But analyzing what’s happened and trying to make some sense of it all is crucial if you want to prevent this from happening again in the future.

Avoiding this further down the road is actually not that hard – but you have to be able to look at your situation objectively. And that’s what people tend to have problems with the most. Being honest with yourself is a skill you’ll have to master separately, and while it’s beyond the scope of this article, you should put some time into it whenever you can.

How It Happens in the First Place

Usually, having to take out multiple loans in succession can be traced back to one or a few irresponsible decisions at the start of the cycle. The key word here is that it happens early on. Afterwards, things just snowball into a more major situation that becomes progressively more difficult to bring under control.

Also, people often overestimate their abilities to pay off the loans they’re taking out, resulting in having to cut corners over time. But as those cuts start to stack up, you will sooner or later run into certain issues with your lifestyle that will push you towards taking out even more loans. And thus, the vicious cycle continues.

Common Mistakes to Avoid

First, avoid taking out a loan if you have other options. Sure, it’s easier and more accessible than most other things you can do to get out of a bad financial situation. But that’s also the reason why so many people find themselves in trouble as a result of taking out loans in the first place. Whenever you’ve made the decision to borrow money, it should be your only available option, the one you resort to after exhausting all others.

If you find yourself thinking of taking out a second loan to cover an installment on the first one, it’s time to take a hard step back and figure out what’s going on. This is often the point where things start to get really bad, and the time to pay more attention to your financial situation and habits.

Know Your Options

As we mentioned above, taking out a loan should be a last resort option that only comes after you’ve run out of alternatives. Check to see if you can’t borrow against any long-term savings accounts that you might have, such as your retirement plan. Sometimes you might be able to get some of that money early in the form of a loan, but keep in mind that it might have harsher interest rates and other factors.

Borrowing from friends and family is also something you should not disregard as an option. It’s not ideal in terms of the awkwardness it creates, sure. But it’s far less ideal to be in a desperate financial situation that you can’t climb out of.

Don’t Borrow Too Much

Just because you’ve been approved for a loan doesn’t mean that you should go wild on borrowing as much as you can. In fact, try to minimize the amount that you’re getting, and always prioritize cutting out some of the expenses that you need the loan for, over getting a larger loan. Many lenders will make it very easy to get your hands on large sums of money, but this is a double-bladed knife.

Unless you’re absolutely confident in your ability to repay those loans, getting a larger one than you were initially planning is a recipe for disaster. Don’t be tempted by promises of lower interest rates and other attractive features. Keep your eye on what truly matters – using the loan to fix a problem that you’re having.

Get Ready for a Few Tough Weeks/Months

And in the end, sometimes preventing this from happening again in the future comes down to one simple, but uncomfortable truth. Perhaps it’s time to tighten your belt a little and become more conservative in your expenses. Sure, it’s unpleasant – anything that you can cut out from those expenses is likely something that you’d rather not lose in the first place.

But having to deal with growing debt with no viable way out of the situation is far, far more unpleasant. And it’s surprising to see so many people preferring the option that provides short-term gratification, rather than making the adult decision to fix things in the long run. It will be bad for a few weeks, but you’re definitely not going to regret the feeling of relief that will wash over you afterwards.

Smart Ways to Use Your Extra Money

Having a little extra money fall into your lap is certainly a wonderful feeling. It doesn’t happen that often for most people, but when it does, it opens up a variety of new opportunities. Sometimes, it may allow you to get out of a difficult situation that you’ve been dealing with recently. In other cases, you can do something good with that money and put it towards a savings account or invest it in some way.

The important thing is that you’re not careless about those windfalls. Making the most out of those situations is critical if you want to see your finances grow properly in the future, and you shouldn’t just go out and spend the money outright. You should sit down and carefully evaluate your options, and figure out an appropriate plan of action. Even better, you should have that plan already prepared in advance and just be ready to act on it when the opportunity presents itself.

Getting Started with Investing

Investing is a scary word to some people. Many associate it with losing money, stressing over graphs and tables, and generally feeling anxious. But that’s far from the case if you do it right. Sure, there’s always the chance that you might fail and lose money. But what separates good investors from the rest is the way they approach each situation, and how prepared they are to take those hits.

If you can’t afford to lose any money right now, then sure, investing is definitely not for you. But if you’ve just come across some extra cash and want to put it to good use, then take your time to do some online research, and get started with investing.

Repairs and Maintenance Expenses

If you have any expenses that have been looming over your shoulder for a while, now is the right time to take care of them. From medical expenses, to auto repairs and home renovations – depending on the amount of money you’ve received, sometimes it can have quite the impact on your life.

To make this easier, maintain a list of important expenses that should be prioritized in case something like this happens. That way, you won’t have to waste any time and you can get right to fixing the things that matter.

Side Business

Have you been thinking about starting a side business of some sort? Usually, the main factor stopping most people from getting into that is money. You need an initial investment for most types of side ventures, and sometimes it can be a pretty hefty one too. If you have the extra time to invest into this, you should think about putting some of that extra money into it.

One thing to keep in mind here is that you should be constantly doing some market research with regards to your idea to ensure that it’s viable. The market keeps changing quite fast, and just because you have the right idea today doesn’t mean that it will still be a good one tomorrow. Half an hour of research every week or so can prevent you from wasting a lot of time when you get your hands on some extra cash.

College Fund

If you have kids, a college fund is one of the best types of long-term savings that you can do for them. Higher education can be very expensive these days, even if you don’t necessarily want to study at one of the top institutions. And it’s much better to provide your kids with the platform they need to stand on instead of having them take out student loans.

This is especially true lately, as people have been learning more and more about the dangerous side of student loans and the impact they can have on people’s lives in the long run. Starting a college fund early on is by far one of the best things you could do for your kids.

Savings Account

And if you don’t have any kids – or you’re already taking care of their college fund in another way – you should think about your own savings as well. If you haven’t been putting any money aside lately, this might be a good opportunity to start. Set a limit, and try to reach it – it will be much easier when you’re starting off with a nice chunk of money already available.

Don’t push this too far though – saving money only makes sense up to a certain level, after which you’re better off putting that money to other uses. The ideas we mentioned above are a good start, but the modern market offers even more than that.