The Right Amount of Debt

When considering the right amount of debt to assume you must realize that there is no universal number. There are guidelines that you can follow to avoid assuming too much debt but there is no magic number to use.

Lenders are usually happy to extend you as much credit as you are willing to take. They are taking risks on these loans but they are calculated ones. They look at the rates of interest, rates of defaults, and thoroughly review your credit history prior to making a decision. You as a borrower can benefit from evaluating lenders with such a fine-tooth comb.

Consider your past credit history and the chance of your defaulting on a debt. If you feel that the chances are high of you not being able to repay the loan then don’t apply for it in the first place. Also, avoid the possibility of bankruptcy or debt consolidation as factors in making your decision. Knowing that in a year or two you could file for bankruptcy is not an acceptable reason for assuming a debt that you know you probably cannot afford.

Look at your past credit history in the same fashion as a lender would. Consider if you were the lender examining a potential client. Would you extend them credit? And if so, how much? Would you feel comfortable in doing this or would you worry about them defaulting? Chances are that if you examine yourself like this honestly you will be able to make better decisions about whether to take on a loan.

Making projections for future interest trends based on past and current interest rates is also a good idea. Businesses and lending institutions do this so why shouldn’t you. It’s difficult even for a financial professional to be certain of the accuracy of their predictions; however, as trends are not random they are good guidelines.

Also, avoid justifying purchases that are simply not necessary. Yes you may want a new sports car but if the Honda Civic you have had for the last 3 years is still running well then why take on another $500 monthly payment that you may not be able to realistically afford. In addition, you may be able to buy used or wait for the market prices to drop. Impulse purchasing is the fastest way to get yourself it a financial bind so be careful.

The satisfaction of the purchase may be great now but the financial trouble of an uninformed decision to assume debt can take you much longer to overcome than the pleasure the purchase provided.

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