Financial Freedom Week 8 Recap: Lending
Posted Feb 25, 2015
Last week we covered common lending terminology and felt that it would be a nice transition to follow up this week with lending. There are dozens of tips, hints and rules when talking about Lending but we tried to pick some areas not normally addressed because for many people they can be sensitive subjects. First off was student debt. This is a huge topic nowadays and our first tip pointed out a simple rule to go by: Never borrow more for college than one expects to earn the first year out of school.
This can be a hard conversation because you want young graduates to have dreams of making a healthy living but they need to understand that there are limitations to entering the workforce straight out of college. Even lawyers don’t make as much as they used to!
Another hard topic we discussed was lending money to family and friends. Many people think of this as a way of showing love. The unfortunate reality, however, is that lending money between friends and family is often a horrible source of stress. In many instances this stress can be the undoing of a once strong and healthy relationship. If you offer financial assistance it is important to understand that you may end up taking on a parental role in a relationship. You may find yourself questioning the purchases that the borrower makes, and while natural, it is important to understand how relationships can change when lending enters the equation.
The last “hard” talk we had this week was over our weight. A simple tip that we offered was for a person to look at their weight and their credit score at the end of each year. Many people consciously try to make sure that the number on their scale goes down each year, but too few people try to make sure that the number on their credit score goes up. As long as a person's credit score is rising with each passing year they are probably not going to find themselves in a situation of financial turmoil. This can be a simple and easy way to gauge a person's financial health at the end of a year.
There were happier points throughout the week and we even discussed “GOOD” debt. Yes, there is such a thing! You can tell good from bad debt by simply asking yourself if you need it. Another indicator for good debt is the interest rate. For necessities the interest rate will generally be lower, like on car or a house. Mortgage interest rate is also tax deductible.
Peter also stopped in this week to cover some issues dealing with lending. He reminded us that even in business, honesty is the best policy. Don’t try to sugar coat or hide any misfortunes. If your lender notices that you are not being totally truthful about past financial issues they may see this as a hindrance. Keep in mind they will see your credit score and find out about any issues you had regardless. Another area that Peter talked about was an “ARM”, or an adjustable rate mortgage. If you’re like me and only plan to live in your home for the next 5-7 years, why would you pay a higher rate for a loan on a home you’re going to sell 25 years before it matures? Choosing an ARM could save you thousands in interest over the next 5 years.