Can You Use Debt to Build Wealth?

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The short answer is YES. You definitely can. It all depends on what kind of debt, and how smart you are about using the money you borrowed, and how diligent you are at paying it off. So now you may be asking, if debt can be used to build wealth, how do I do it?

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First off, you need to know about the two kinds of debt: Good Debt and Bad Debt. Good debt is a kind of debt that has low interest and is used to increase your value in the long run. Bad debt, on the other hand, has atrociously high interest and depreciates in value fairly quickly. Examples of good debt would be student loans and small business loans. Bad debt would be payday loans and credit card debt.

 

So if you really want to start getting a lot of money using loan money, you need to make sure it’s the good kind of debt. That part is simple. Now let’s get to the hows.

 

Let’s start with small business loans and the idea of leverage. You can take out a small business loan to help you improve your business. The more you invest in yourself and your business, the greater your chances are of increasing the flow of your income. You can use your small business loan to increase your inventory, or add a branch or service to the current ones you already have. Using loan money as financial leverage to increase your cash flow is a good idea. If you don’t have a business, you can always get a small personal loan and then start a business or invest in educating yourself about a particular business or skill. The more you invest in yourself, the bigger your value will be.

 

But what if you already have bad debt? Would this affect your ability to build wealth using debt? It would, but perhaps not as much as you might think it will. For example, you have several credit card debts and they are growing by the month. You struggle to pay off even just the minimum and building wealth is beginning to look like a pipe dream. You can try doing debt consolidation. What this does is lumping all of your debt into one big debt with a lower interest. This way, you don’t owe several banks different amounts of debt with various interest rates.

 

In order for you to be able to build wealth, using debt or not, the very first step is to get rid of, or to manage your bad debt. Once you get that squared away, you can start building your wealth. It is a good thing to remember to always live within your means. And the simple math of income being greater than living expenses should always be something you live by.

 

Which leads us to the next tip: Reduce your living expenses. The greater the difference is between your expenses versus your income, the more money you have to use as an investment. And perhaps, the best advice one could give when it comes to finance is this: always pay your debt on time and if at all possible, always pay in full.

 

 

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How to Avoid Falling Into A Deep Debt Hole

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Debt is a fact of life. From student loans to mortgages, it seems like every milestone of adulthood requires some form of debt. It’s no wonder that a majority of adults are buried in it, causing major anxiety for people. They dread the day their bills would come, fearful of the words “default” and “late fees”.

 

In today’s world of mounting debts, how can you avoid sinking into this deep dark hole? Here are few important things to remember to keep you off the path of debt.

Live within your means. It’s simple but smart. If you don’t want to be in debt, learn to live within your means. Only spend the money you have and can afford to part with. If you see something you want but cannot purchase yet because you lack the cash, assess if you really need to have it now or if you can wait until a little later to buy it.

Be frugal. Ask yourself: do you really need that overpriced latte? Or that new expensive phone? Do you have to eat out–for the third night this week? Always think twice before swiping that card or digging for cash. Make your own cup of coffee, prepare your own meals instead of ordering or eating at a restaurant, and do your research and opt for less expensive alternatives offering the same quality when purchasing something.

You don’t need all those credit cards. Stick to just one or two. And make sure that when you are choosing your credit card, you pick one that has low interest rates and great perks.

But what about when you already have debt?

Pay at least the minimum, but if at all possible, pay more than that. Credit card debts, especially unpaid ones, are very quick to get larger because of high interest rates and late fees. Make it a point to pay at least the minimum. If you can afford to pay more, then do so. This will go towards you slowly chipping away at your credit card debt and not just staving off defaulting on it.

Have a monthly budget. It is very important to operate on a budget. It will help you avoid overspending and even help you start on your savings. Having a budget will also force you to keep track of your expenses and your bills.

 

Try debt consolidation. This means consolidating all your debts from different institutions into one large debt that you can pay off. It would also mean that you can enjoy a smaller interest rate. But do make sure pay this off, too, which brings us to our next tip.

Pay your debts. If you owe something, pay it off. If you avoid paying debts, your bank will slap you with late fees that could compound your debt into something that would someday seem insurmountable. Not paying your debt will also bring your credit score down. Having a bad credit record can sometimes affect employment prospects as well as affect the approval of any future loans like mortgages.

When it comes to debt, having as little of it as possible is always a good thing. Never bite off more than you can chew and always pay back what you owe.

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Possible Reasons Why Your Personal Loan Application Got Denied

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When your personal loan application gets denied, it can be disappointing. Most people are also puzzled. Even people with strong credit scores can get denied, and it makes them wonder why. Below are a few common reasons why banks deny personal loan applications so the next time you apply for one, you’ll know what and what not to do.

 

  1.  Bad credit score

 

Let’s get the most obvious reason out of the way. When you have a bad credit score, lenders are most likely to deny your personal loan applications. Your credit score is what tells banks the likelihood of you paying them back for the loan. If your track record is not very good when it comes to paying what you owe, chances are your bank will be resistant to granting you loans.

 

  1. The loan amount is too high

 

Lenders will take into account your capacity to pay back when you apply for a loan. When you fill out that loan application form and put in too high of an amount in the “desired loan amount” field, banks will most likely deny your application. To avoid this mistake, use an online loan calculator. Loan calculators can tell you how much you can borrow given your current income.

 

  1.       Unstable employment record

 

Because banks consider your ability to pay the loan off in the long run, they will be looking at your employment record. So if you have an unstable employment record or worse, no employment at all, banks will be hesitant to grant your loan application. Lenders will require certain employment tenure or length of service, which is why banks typically require you to submit a certificate of employment.

 

  1.  Insufficient income

 

When you don’t make enough to apply for a loan, you will most likely not get approved. You need to be able to make the monthly loan repayments, and If you do not make enough money to pay them and at the same time address your basic needs as well, lenders will not grant you a loan. This is because you are most likely to use your income for your basic needs than to pay off the loan.

 

  1.  You have too much debt

 

When you apply for a personal loan, your bank will do a background check to see if you have any outstanding loans. This is so they are sure that you have the capacity to pay. If you meet the minimum income requirement and have a good credit score but have several outstanding loans, they will most likely be hesitant to grant you another one. The more loans you have, the less capacity you have to pay back an additional loan.

 

  1.  How you fill out the loan application

 

If you have any mistakes or inconsistencies in your loan application, lenders might not grant you your personal loan. Your data needs to be complete, correct, and consistent. Lying on your application will get you denial and could possibly land you on your bank’s bad side.

 

Consider the list above the next time you apply for a personal loan. Make sure you fill out the application completely and honestly, have a good credit score and enough income to make the payments, and make sure you’ve been employed a while.

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