What are the alternatives to taking out a loan?

For some people, a loan is simply the wrong product. There are many reasons for this. Some people just have a pathological fear of getting into debt. Others are just no good at managing debt. Some have such a bad credit history or current rating that its almost impossible to find someone to lend to them and when they do its at such punitive rates that its really not worth it. So, are there realistic alternatives to taking out a loan?

Well, yes there are, and the first is to speak to your employer. Companies are cash generative, they also pay you money every month, thus can simply take your repayments out of your wages. Larger companies have a set policy for this, so you should ask you personnel department about it should you wish to go down that road. Should you work for a smaller company, ask your boss.

Sometimes, companies will offer you an interest free loan, or at least a much lower interest rate than you'd get for a loan. BUT, in return for this you should expect to be tied down to the company until you have paid back the loan. Should you leave the company you may have to pay back the loan immediately, for which you may need to take out a higher rate loan. So make sure you will be staying with the company if you ask them for a loan.

Another alternative to a loan is to use your own savings. To some people, this is a real bind, because they like having the comfort of have something put aside for a rainy day or an emergency. This is the same rationale that businesses use to justify taking a loan to protect their cash position. In the long run though, you're actually likely to be able to put aside more should you not take out a loan.

A loan will cost you more to take out, a long term loan could actually cost you double what you actually borrowed, and with interest rates where they are today you are unlikely to make anywhere near enough money from your savings should you leave them where they are. It is general opinion that you should keep between 3 to 6 months income in your savings account for emergencies, but anything above that should be used for investment or anything you might take out a loan for.

How about simply not buying that car? Or not making that home improvement? Are they worth the cost of borrowing? It has been found that 3 in 5 people are getting into debt for something they later wished that they hadn't bought.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

© AskFinancially.com 2008

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