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It’s common to borrow money.
Whether you’re taking out a student loan, applying for finance to buy a car, or looking for a home loan, borrowing can be an important part of reaching your goals.
But do you understand the psychological factors that can influence your borrowing decisions?
Here are some things to think about.
Emotional triggers of borrowing
There are a number of ways that your emotions could influence your decision to spend money and to borrow to do so.
If you find yourself in any of these situations, it may be worth considering whether you really need to proceed.
Impulse buying
When you’re buying something because you’re excited about it or just caught up in the process of shopping, it might be an impulse purchase that you haven’t really thought through. That could be fine – but in some cases, it might mean you’re spending money you didn’t really need or intend to.
Social pressure
It’s common to buy things because other people are. Maybe all your friends have a fridge with a water cooler and ice maker in the door, so you decide you need one, too. You might also experience peer pressure from friends or family members, who try to influence what you buy. If you’re in this situation, it’s worth taking a step back to evaluate whether the purchase, and borrowing money for it, is really what you want.
Fear and anxiety
The fear of missing out (FOMO) is real and can be a driver of lots of purchasing decisions. Take some time to check whether it’s based on a logical concern before you dive in.
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Cognitive biases in decision-making
Human brains are fascinating things, and there are lots of ways that they can work for and against us when it comes to big decisions.
Here are some ways your biases might affect your borrowing.
Optimism bias
An optimism bias might make you overconfident about the future. This could lead you to borrow more than you might otherwise have felt comfortable with.
Lenders won’t approve a loan unless you can demonstrate you can afford it, regardless of how optimistic you are about your finances ; if you know you lean to the more optimistic side, it may be worth taking the time to think about how you would cope if things didn’t go to plan.
Anchoring effect
Anchoring refers to the way that an initial piece of information can get stuck in your brain.
If you’re shopping for a car, for example, and you see one you like for $50,000, your brain might anchor the value of that car in your mind at $50,000. That means when you see one at $45,000, it feels cheap – even if the cars were only ever worth $35,000.You can overcome anchoring bias by checking yourself on these assumptions – why do you think a price is good? Could you find other ways to check the value?
Loss aversion
Humans usually feel losses more acutely than gains. This means that the pain you feel from losing $250 is much worse than the pleasure you feel from making $300. It can affect purchasing decisions because you don’t want to part with the money, and it could also mean you’ll stick with decisions that weren’t right because you don’t want to give up. You can try to combat this by keeping your long-term goals in mind.
We are all about responsible borrowing
Responsible borrowing is vital to us. At better finance™, our process will check that any loan you are considering is affordable for you, based on your individual circumstances and situation.
We can offer you personalised loan options, financial advice and the educational resources you might need to make an informed decision. We’re here along the way to help you with any questions you might have.
How to overcome borrowing challenges
Responsible lending rules should mean that generally won’t be able to take on more debt than you can afford based on your current income and expenses, but life happens and it is important to think about how you would handle it if you no longer had your current income, or you had additional expenses.
You’ll also need to make meeting your loan repayments a priority.
If you hit trouble, your first step would usually be to talk to your lender about your options. They may be able to help you with a plan for your repayment or look at ways to make your loan more manageable.
It can also be very helpful to have an emergency savings fund that you can turn to if you hit an unexpected financial setback. People are often advised to have three to six months of income in an emergency account so that if they are out of work for a while or have a surprise expense, it doesn’t throw the rest of their financial lives off course.
Effective debt repayment strategies
You can make the process of repaying your debt smoother in a few ways.
Budget
Having a household budget can be helpful in managing your money. This ensures that you have enough funds available for your debt repayments. Setting your repayment to go from your bank account the day after you are paid can also be helpful because you never have to worry about making sure there is enough money there.
Consolidation
If you strike trouble, or find that you are having problems keeping track of your loans, you might look at consolidating your debt or negotiating with your lenders. We can help you look at your options for a debt consolidation loan if you decide that is the right path for you.
Seek advice
Financial mentors, budget advisers and expert financial advisers such as the team at better finance™ are here to help, should you need it.
Conclusion
Borrowing can be a really helpful tool to help you meet your goals, but it needs to be done carefully and with all the relevant information. If you have questions about any aspect of personal lending, get in touch with the team at better finance™. We are here to help.