5 financial mistakes to avoid on loans
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| 5 financial mistakes to avoid on loans |
Our financial obligations change and differ with each new stage of our lives, and each stage requires an adjustment in our behavior in dealing with money according to our financial needs, as in the twenties stage a person can bear higher financial risks and has a longer period of time (the time factor is considered a strength here). However, awareness of correct financial practices, similar to the rest of the previous age stages, may be low. In this series on investment, we have explained what should be done at each age stage:
But everyone has financial aspirations, and loans have now become one of the fastest ways to obtain the liquidity you desire to buy that car or own that particular device, whether through personal loans, short-term loans, or even buying now and paying later.
Thus, you open the door to falling into the loan trap, and with a lack of knowledge or interest, you will find yourself in a financial spiral that hinders you from paying the dues owed to you.
Here are some reasons and simple solutions that will help you recognize and avoid such unintended mistakes, which will protect you, God willing, when thinking about taking out a loan in the future:
1. A lack of understanding of loan risk
Interest and profit rates on loans, credit cards, and even short-term consumer loans represent a risk of accumulating over long periods because most people do not pay attention to their long-term impact, especially on their other returns from investments. For example, if a person continues to borrow whenever he needs liquidity, it is due to his weakness in planning for the future financial situation.
The lack of an emergency fund compounds the problem. Sudden things happen to all of us, but there are those who can use liquidity from the emergency fund and avoid borrowing, while others are forced to borrow to cover a short-term need.
To avoid borrowing, we advise you to constantly evaluate your financial situation and understand your financial habits. Borrowing itself is not a bad tool for obtaining cash, but rather a great one. With planning and wisdom, you can exploit this debt to your advantage.
2. Neglecting the financial situation leads to haste
And in haste, regret! As we mentioned in the previous point, loans are not bad in themselves, but they are a tool, and each tool can be used in a good or bad way, and here we say that when you make the decision to borrow to cover your needs, do not make this decision in a short period of time, because rushing into it may make you neglect it. Other aspects and other better solutions For example, you can ask yourself several questions:
Can I wait longer to avoid the loan, financing, or whatever else? Are there other solutions I can resort to? Giving yourself enough time to make a decision will help you avoid falling into avoidable debt.
3. Failure to organize installment payments
Paying the installments equally when you have multiple loans at the same time is also a common mistake. The primary focus should be on paying off the loans and getting rid of them. As priority is given to loans or monthly installments with high interest, for example, you have dues from your credit card and a personal loan. You are now paying the “minimum due” for the credit card with the monthly payment for the loan, and the best thing is to quickly get rid of the credit card dues and use it as a card. prepaid; By all means, avoid late payment of credit card dues because it has the highest interest rate of all the financing solutions provided by banks.
4. Incorrect estimation of expenses
An incorrect estimate of expenses is one of the most common reasons for an unstable financial situation. You think that you spend $4,000 per month on gasoline, but in reality, you spend $3000 per month, and so on.
The correct way to estimate your expenses correctly is to monitor them through monthly budgets, and we make the process so easy for you that you can set dynamic budgets (that is, you do not need to set a limit on just one classification, but rather you can set a limit and then put several classifications within it and monitor them in one place). for example:
In this way, you can build a visualization of the extent of your spending and know the average spending on certain categories so that you can estimate your expenses correctly.
5. Borrowing for investment
Without mentioning the risks that come with borrowing to invest, with interest rates so high, borrowing to invest is a crazy idea.
Some medium loans (5 years) are issued with 3-4% interest, so you need investments whose returns are much higher than that (after deducting investment costs and zakat). Therefore, in many cases, you will lose your invested money and have to repay the loan, so borrowing in order to invest (or what is called financial leverage) is not a good idea for individuals and will not benefit you but will harm you more. It is a choice made by professional investment managers, and individuals should not resort to such tactics.