It seems almost axiomatic that big-ticket items require some type of upfront payment. A lot of people find it difficult to come up with that down payment for items that cost tens of thousands, like cars, or items in the hundreds of thousands, like houses. But we all have to get to work. And we all have to live someplace. So if you don’t have the down payment sitting in the bank, you will have to obtain it somehow. Here is the best way to come up with the down payment:
Get a Bank Loan
One of the best reasons to get a loan through an established, financial institution is that they have a strong incentive to make sure you are a good risk. They tend to do their due diligence. And in doing so, they may turn you down. That is not the worst thing in the world. Generally, being turned down means that you don’t have the finances to make timely payments over the long-term.
Banks look at your credit score. According to this FICO credit scores guide, some of the key elements are:
- Debts Owed
- Age of Credit History
- Recent Credit
- Types of Credit
We tend to allow emotions to play an important roll in determining whether or not we can handle a particular debt. We rationalize, fudge the numbers, and bargain with whatever god we believe in. But banks use math, history, and probabilities to determine if the new debt makes sense for us. They are right more often than not. There is benefit to having a critical third-party as a reality check for big purchases we may not be able to handle.
Borrowing From Family Is Wrong for Many Reasons
You can probably think of a number of reasons why borrowing from relatives is a bad idea. It creates friction in relationships. It can financially harm the one who lends you the money. And there could be negative tax implications.
Many people never consider that last one. But It is important not to overlook tax implications when considering a family loan. An Australian study shows that the average Aussie borrows about $2,400 from family members. Unforeseen emergencies top the list of reasons for such loans. Applying emotional pressure on your family to bail you out of your shortsightedness and irresponsibility is selfish and unethical. Children rely on families for financial support, not fully realized adults.
Getting a Payday Loan
If there is one thing even worse than borrowing from family, it’s borrowing from loan sharks. Dave Ramsey warns that the payday loan trap is a game you can never win. From the article:
…around 12 million Americans take out payday loans each year. Of those who borrow, they average eight loans of around $375 each and pay around $520 in interest.
It seems like that should be a crime. And in some states, it is. Taking out this kind of loan almost guarantees that you will have to eventually go to family and friends to get another loan to make the payments. The following month, you have all the bills from the previous month, plus less money to pay them thanks to the payday loan. You will never be able to make the payments on the new car you purchased.
When you go into a pawn shop with your valuables, be prepared to have them undervalued. Also, be prepared to never see them again. The problem is that you need money that you clearly don’t have, and have no other way of getting. You are likely living paycheck to paycheck. Add just one more expense, and you are going to need a risky loan. That’s what brought you into the pawn shop in the first place.
Is the temporary loan worth losing the heirloom that has been in your family for the past hundred years? Probably not. What all these bad loans have in common is they provide you money when you are clearly not in a financially feasible position to pay it back. If there are no reputable, third-party sources that will give you a loan, consider changing your lifestyle before borrowing from family, getting a payday loan, or pawning the only thing you have with intrinsic value.