Is Dave Ramsey Correct about Debt?

Is There Such a Thing as Good Debt? The Good vs. Bad Debt Debate!

One out of every five American citizens is grappling with debts on medical bills, mortgages, student loans, and credit cards, exceeding their savings and liquid assets. This is according to research by the University of Michigan.

Is there such a thing as good debt? Good debt is money that you borrow to increase your net worth and help boost your income. Financiers classify the following as investments worth a debt.

Real estate investment. Since property appreciates in value, buying a house for resale, renting out, or commercial real estate is a worth investing even with borrowed money as it can bring more.

Investing in high return bonds and stocks is another way you are likely to recover your money fast and make a profit. It, however, needs someone who understands the risk and well versed in the trade.

Education is also considered as an investment worth borrowing for, as the expectations are that the knowledge and skills gained open doors for lucrative well-paying jobs. If this happens, then the returns of the investment are positive.

As with everything else, moderation is key. A good debt quickly turns into a bad one when a borrower overindulges and takes much more than they can pay comfortably. You may have a provision for borrowing a considerable amount. Take what you need and can pay for though. Consider the interest rates before you proceed.

Again, recent changes in the market are a clear indication that even real estate does not guarantee ROI. Though the market fluctuated downwards, other charges like home maintenance costs, real estate taxes, homeowners association fees among others are constant.

While bonds and the stock market has high returns, one can quickly make massive losses in a split. Unfortunately, some factors that affect the stock exchange and bonds market are beyond the stakeholders. For example, political stability. A sudden downhill trend may turn a millionaire whose main trade is the money market to a pauper.

Education on its own does not guarantee money at the end of the course. There is need to select your career and field of study carefully. The current crunch plays a significant role in job availability. During economic down-times, good jobs are hard to find.

Bad Debts

While the above mentioned are cases of good debts gone bad, there are out-rightly bad debts. Here are some:

Borrowing to spend on luxuries or buy a luxury car is not wise investment hence bad debt. Paying a huge interest on a new car is a bad financial move, while you can opt for a used cheap car that functions well and meets your needs. A car depreciates fast. Borrowing to buy a new car is therefore not a sound financial move. Also, try to apply for interest-free loans

You should always purchase clothes and other consumables on cash basis only. Paying interest on things like vacations, clothes, gas, vegetables is not practical. To avoid such debts, you need a serious budget plan, and to adopt a lifestyle you can afford.

Credit cards cover a considerable percentage of the bad debts as the interest charges are higher compared to consumer loans rates. While credit card reward systems offer incentives, the interest rates offset the benefits.

Conclusion

Few people can afford to pay cash for all the services all the time. Just like everything else, it is crucial to take credit after a careful thought process. Though some amount of debt is inevitable in our society today, a good debt can quickly turn into a bad one. With a sound decision and necessary information, however, debt can help one create wealth.

 

Five Reasons the Banks won’t give you a loan!

Tired of No? The Five Reasons You Can’t Get a Business Bank Loan

Any business expansion requires a financial boost, especially for small businesses. It is impossible to run the business entirely from your finances. Getting financing is a challenge for most entrepreneurs. Many know too well the pain of rejection. There are many reasons that businesses fail to secure funding from the banks. Here are some:

No or Bad credit reports

A credit score is one of the primary determinants for a lender too make the crucial decision of whether or not to lend you money, and at what rates. It shows your credit worth. Various credit bureau reports give individuals and businesses multiple credit scores as they all use different methods to calculate.

Some of the reasons that lead to low credit scores include, but not limited to, missed or late payments to lenders, credit card vendors, credit card issuers, bankruptcy among others. New businesses may not have established a credit history though. Banks also increased the credit score standards during the recession making it harder for small businesses to secure loans.

Businesses and individuals can raise credit scores by spending under the credit limit, timely payments, and keep credit lines open.

Weak cash flow

Lenders favor businesses that demonstrate the ability to pay through a steady revenue stream. Companies that are struggling to make rent, inventory, payroll payments, may struggle to pay the loan. For small businesses, keeping reasonable cash lying in the bank is a tall order, even when making profits.

To increase the chances of getting business loans, a business owner should ensure that more money is coming into the business than that going out. Find a way of growing revenue while keeping the expenses on the minimal before applying for a loan. As a business person, understand your operations and be keen on the flow of money.

No collateral

Before lending, banks require some form of security. Collateral is either equipment or property valuable enough to compensate the bank should you default the payment.

In the case of collateral, the amount the lender gives depends on the security value. Most ventures use cars and property as collateral, hence the most common.  Without such assets, banks hardly consider lending any business money as the risks involved are so high. Small businesses may find it hard to get funding from the banks as they are yet to acquire anything the bank deems valuable enough to secure a loan.

Inadequate preparation

Getting a loan approval is a process that requires thorough prior preparation and involves a lot of paperwork.   It is more than walking into a bank and filling the application. A business needs financial statements or projections, business and personal credit reports, written business plan, bank statements, and tax returns.  Other documents required are articles of incorporation, leases, contracts, operating license, permits, and any other relevant documents for operation.

Without these documents, the bank will deny a business funding. Before applying for a loan, you should ensure that you have all the papers in place and up to date.

Small loans

Banks are in business too, and although the process of getting a loan is tedious, they want to maximize the interests and profits of the few that qualify. According to a Havard School of Business research in 2014, most startups seek less than $100,000 loans. It is more profitable for banks to underwrite large loans as they are earning more from them compared to small ones.

A business may be forced to check alternative lenders, other than banks, for small loans. Lending Club, OnDeck, and Dealstruck offer enterprises to the small fundings alternative.

If you are tired of banks saying no to your loan requests, you can consider other options or work on the factors mentioned above. To get one of the most established company’s backing helps you get funding. This is because the company takes responsibility in case of a liability. Some lenders file for IPOs to get the funding, as an alternative to bank loans.