How to Avoid Falling into Debt When Taking Out a Loan

Sometimes, poor decision-making or unexpected emergencies can cause financial distress. When it comes to borrowing money when you’re in a bind, there’s a right way and a wrong way to go about it. Emergency loans are a good example of a right way. They can be helpful when you’re trying to reduce financial stress while resolving financial obligations. 

There are many ways to keep debt from becoming unmanageable when taking out a loan. It all boils down to having a realistic understanding of your personal finances. Continue reading to learn more. 

Create a budget you can stick to  

Many people have a budget but rarely stick to it. Planning without following through can be a recipe for disaster. So, if you create a budget, commit yourself to following it. The best way to do that is to evaluate your monthly income and expenses and set realistic goals that align with your resources.  

One example of this is budgeting for take-out food. It’s easy to say you’re cutting eating out from your budget altogether, but can you stick to that? Limiting what you spend on take-out food could be easier than eliminating it entirely. Review all your expenses and find areas where you could spend less. That will free up money to save for emergencies.  

You’ll also want to look at “wants” and “needs” when reviewing your budget. Premium movie channels aren’t a need when there are streaming services offering similar programming at a fraction of the price. They’re not a need at all, if you think about it. The same could be said about those expensive brand-name foods you buy at the supermarket or another pair of shoes to add to your collection. 

Pay down high-interest credit card debt 

Taking out an emergency loan isn’t a big deal unless you have a bunch of other debt you’re already paying off. The worst of that is typically credit card debt.  

Interest rates on most credit cards are much higher than what you’ll pay on a personal loan. Work on paying them off before you experience a financial crisis. That will make the new debt more manageable.  

Another benefit to eliminating credit card debt before applying for a loan is that your credit score will likely go up. This can possibly lead to lower interest rates, fewer fees, and more reasonable terms on a new loan. It will also open the door to more lenders.  

Start an emergency fund 

Having money in a savings account for emergencies doesn’t mean you need to pay cash when something unexpected happens. Those funds are a reserve, a guarantee that you can pay off your loan even if your financial circumstances change. Start saving today by putting a few dollars in the bank here and there, then do it consistently every time you get paid to watch your savings grow.           

The Bottom Line 

When taking out a loan, you’re taking on debt, but it doesn’t necessarily have to be bad debt.  There are steps you can take to make the process of borrowing and repaying easier on yourself. By creating and sticking to a budget, paying down high-interest credit card debt, and starting an emergency fund, you can put yourself in a much better position financially. 

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