Reasons Borrowers Use Loan Proceeds On The Wrong Expenses
Once your loan has been approved, letting money slip through your fingers will be easy. After all, you have been stressed for weeks or even months. You have been forced to cut back and sacrifice things that can normally give you that feeling of reprieve. However, prioritizing immediate desires without considering the lasting impact on overall financial health has its consequences.
Here are common mistakes that borrowers make once they receive the loan proceeds:
- Unwise Spending Choices
People are prone to making unwise choices especially when under pressure or stress. Borrowers often succumb to the allure of non-essential purchases or indulgences. Who would not want to treat themselves to their favorite meal after eating only home-cooked, budget meals right? Who would not be tempted to check off a travel destination from their bucket list and bond with family and friends once they have funds for plane tickets and hotel accommodations?
People tend to forget the purpose of the loan once immediate rewards are within reach. The siren call is harder to resist when one is not used to being mindful about their spending habits.
- Lack of a Plan and Budget
Without a clear financial plan, borrowers may struggle to prioritize essential needs over discretionary wants. By preparing a detailed list of where the loan proceeds should go, one need not rely on willpower and self-control alone. Having a plan is winning half the battle. You will have a clear picture of where every cent of the loan proceeds will go. This is why it is also important to try to be as detailed as possible.
It is best to come up with a plan even while you are still applying for a loan. Preparing for how you will use the money will help you focus on what needs to get paid first. There are instances when the approved loan amount is not enough to cover all the bills and expenses you need to pay. When this happens, a detailed budget will be able to help you rank your payables in order of priority. You can choose depending on what is already past due or what will have a big impact if left unpaid.
- Ignoring High-Interest Debt
Avoid the mistake of ignoring high-interest debt. This is a common yet risky mistake. So make sure to address pressing debts especially those with high interest rates. Resist spending the loan proceeds on less urgent expenses. Making the wrong choice can worsen financial instability, creating a cycle of debt with prolonged challenges and increased overall financial strain. To break free, it’s crucial to prioritize tackling existing high-interest debt as soon as possible.
To ensure you can avoid this trap, list down all your existing debts including loans you secured from online apps and quick money lenders. In your list, include the total amount of obligation, the term, and the interest rate. Once done, you can rank your debts based on these factors. Ideally, you can use the loan proceeds or a part of it to settle a high-interest loan.
- Failure to Differentiate Needs and Wants
The challenge lies in distinguishing between what is necessary for maintaining a basic standard of living and what constitutes discretionary spending. Without a clear understanding of these distinctions, one will most likely spend the loan proceeds on wants and luxuries. Remember, these funds are not given to you for free. In fact, the amount you receive will not be the exact amount you need to return. You also need to pay interest on top of your loan obligation.
This poses another risk. Even if you are able to pay the amortization right now, if you lose your job or get hospitalized, you will not be able to do so anymore.
Addressing this issue requires a conscious effort to establish clear priorities, ensuring that the allocation of loan funds aligns with genuine necessities and contributes to sustainable financial well-being. If you are not yet clear on what expenses are non-negotiables and what expenses are non-essential, you might not be ready to apply for a loan. It will only be a rabbit hole of multiple, unmanageable debts.
- Emotional Spending Habits
We have ingrained habits and attitudes towards money that we autopilot on because of a wide variety of factors. Marketers and salesmen know how to exploit these feelings, especially in this day and age of hyper-connectivity through social media and the internet.
Be aware of your own triggers and how these can drive impulsive decisions. Keep in mind that these choices affect your financial stability. Remember that the emotional satisfaction you will feel will be fleeting, while the ill effects of mismanaging the loan proceeds have long-term effects.
Conclusion
Use your loan proceeds wisely. Reflect and plan. Anticipate your weaknesses and tendencies. Remember that loans come at a price. You would not want to mismanage your loan proceeds.
Be wise about how you can leverage your loan. Think twice before treating yourself to unnecessary expenses. For sure, you would not want to find yourself in the same dire situation you were in before you secured your loan.
