The mental hurdle of making a large purchase is enough to make anyone second-guess themselves. It is normal to feel this way because after all, a big purchase is a significant financial investment. You could be making payments on this item for years to come, so you must be confident that you can afford it before taking the plunge.
But before you talk out of that new car with a built-in massage chair or that home with a temperature-monitored indoor pool, hear us out.
Financial planning can help you get through this major episode of splurge without putting yourself in danger of debt. Here are 7 foolproof tips for finances:
1. Determine How Much You Can Spend
If it were for our wants and desires, we would all be driving Ferraris and living in mansions. But unfortunately, most of us have to stick to a budget because our income only allows us to spend so much.
Before making a big purchase, consider your budget and figure out how much you can realistically afford to spend. Some practical ways to do this include:
• Listing all of your current income and expenses
• Tracking your spending for a month or two to get an idea of where your money goes
• Identifying areas where you can cut back
2. Get Pre-Approved For A Loan
So, where are you located? Your place of residence will play a huge role in what you can or can’t afford. New Zealand is 46% more expensive than the UK. That covers both big-ticket items as well smaller everyday purchases. Many New Zealanders take loans from https://nectar.co.nz/personal-loans/ to finance big purchases like cars, homes, or weddings.
When planning to finance a large purchase, getting pre-approved for a loan is the first stepping stone.
Being pre-approved means that your lender has looked at your financial history and decided to give you a loan for a certain amount. It is different from being pre-qualified, which only means that you could potentially get a loan for a certain amount.
Getting pre-approved for a loan offers an insight into how much money you have to work with. It also makes the loan process a lot smoother when you’re ready to make your purchase.
3. Know Your Credit Score
Your lenders will evaluate your credit score when considering you for a loan, so it’s essential to know where you stand. Based on your credit history, it ranges between 300 and 850. The higher your score, the better.
You can get your credit score free from several sites. However, if your score is low, you may need to work on improving it before you’ll be able to qualify for the best loan terms. Practical credit-building activities include:
• Making all your payments on time
• Keeping your credit card balances low
• Diversifying the types of credit you have
4. Shop Around For The Best Interest Rates
Interest rates can significantly affect how much you end up paying for your purchase. Trust us; even a few percentage points can add up to hundreds or even thousands of dollars over the life of a loan.
It pays to shop around and compare interest rates from different lenders. You can talk to your bank or credit union, get quotes from online lenders, or use a loan broker.
Generally, a high credit score can help you qualify for a lower interest rate, saving you money over the life of the loan. But if you have a low credit score, you may not be able to get the best interest rates. In this case, you can either work on improving your credit score or try to negotiate a lower interest rate with the lender.
5. Go With The Loan That Works Best For You
Loan options vary depending on the lender and the product you want to buy. But there are a few common types of loans that you will likely encounter.
The most common type of loan is a fixed-rate loan, which means that the interest rate will stay constant for the loan’s life. Therefore, it is best if you want predictable monthly payments.
If you are looking to finance a large purchase, you may want to consider a long-term loan. These loans have terms that can last several years, giving you smaller monthly payments. But keep in mind that you will end up paying more in interest over the life of the loan.
Another option is an adjustable-rate loan, which means the interest rate can change over time. These loans usually have lower interest rates, but they can go up or down depending on the market.
6. Make A Large Down Payment If Possible
A larger down payment means smaller monthly payments. So if you can make a sizeable down payment, it can make it easier to afford your purchase without stretching your budget too thin. But you will need a backup plan if you can’t come up with the entire down payment.
Consider opening a savings account specifically for this purpose. For instance, you could open a high-yield savings account or a certificate of deposit.
You may also be able to ask for help from family or friends. But make sure you have a written agreement that outlines the terms of the loan.
7. Start Saving Early
It would help if you had a timeline in mind for when you want to make your purchase. Although it might not seem necessary, saving money early as possible is always a smart decision. It gives you some flexibility in your timeline if an obstacle impedes your progress. For now, try these foolproof methods for saving money:
Automate Your Savings: Schedule automatic transfers from your checking account to your savings account, making you less tempted to spend the money.
Earn Extra Cash: Renting extra bedrooms, driving an Uber, extending dog walking services, and other side hustles can help you boost your savings.
Adopt The 50/30/20 Rule: This rule of thumb suggests that you allocate 50% of your income to necessities, 30% to wants, and 20% to savings.
Pay Your Biggest Debt First: This debt avalanche method suggests that you should focus on paying off your debts with the highest interest rates first.
Final Thoughts On Finances Before Profound Purchases
It can be intimidating to make a large purchase, but it doesn’t have to be. If you take the time to manage your finances and make a plan, you will get through it with ease. The key is to save as much and as early as possible. It will give you the flexibility to handle any unexpected costs. And when it comes to securing a loan, knowing your options will help you make the best decision for your needs.
