Paycheck Chronicles

Can You REALLY Afford That Loan?

This morning, my kids asked me about how I became interested in money.  There are a couple of reasons, but we got talking about my job in mortgage banking and how I worked with delinquent borrowers and that I got to review the original underwriting on those mortgages, and that I saw a lot of people who took out loans that they maybe couldn't really afford when they got the loan in the first place.  This led to a discussion of responsibility and whether banks should be making loans and how people needed to be responsible for their debts.

When we were all done, it occurred to me that I really hoped that my children heard one thing from our conversation:  Just because someone is willing to lend you money, doesn't mean that you can afford to borrow the money.  It is up to the individual borrowing the money to know what they can afford to pay, and it is the borrower's responsibility not to borrow more than they can handle.

I learned this lesson the hard way, when I got into credit card debt in college.  I had very little income, and no business borrowing money from anyone.  That didn't stop me from using those shiny cards, and the balances grew quickly.  I was still repaying that credit card debt when my husband and I decided to purchase our first house.  By then, I had a much better understanding of how far our money would stretch, and I had a pretty good idea how much we could afford to pay each month.  I was absolutely shocked when the loan officer said that we could afford to borrow way more than what I calculated.  I guess some good had come from my early debt experiences, because I was determined that we were not going to buy more house than we could afford.  Our friends bought the much bigger houses in the swankier neighborhood, but we settled for a small ranch.  It was more than two people needed anyway, and we didn't fret over the payment each month.

Over the years, I have seen many people take out loans that push their family's budget to the limit.  It might be a home loan, a car loan, or even new furniture or a big TV.  Many people tell me that it was OK because they "qualified" for the loan.  You know what ? That shouldn't mean a thing unless you're saying that you sat down, you carefully analyzed your spending, and you were 100% sure that you could afford that payment each and every month.

When a bank, credit union, or loan company determines that they are willing to give you a loan, it is not their responsibility to look out for your best interests.  It is their responsibility to look out for their best interests.  They make their determinations based upon a general set of guidelines that is a rough average for all people.  They are making their best possible guess that you'll pay them back.  However, they don't know the nuances of your life.  They have no way of knowing the details of your day-to day spending.  You might be a beans-and-rice person who can afford a huge loan, but they can't account for that.  They also can't account for  a long, gas-guzzling commute, a child who is a competitive gymnast (whoo - pricey!), or a habit of buying a new car every two years.

In my dreams, our society changes to start thinking about what they can afford vs. what they can get (or be approved for.)  It's a big step in taking responsibility for your own finances, and it is a key to true financial control.  Don't let other people tell you what your budget says.  Be smart and know what you can truly afford before you make any borrowing decisions.

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