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.

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • Military Money Management Matters

    Nailed it.

    How many of our military families would have a lower stress level if the just had a bit less debt.

    An E3 salary just can’t support a stay at home parent and two car payments, plus brand new furniture from the local Ashley’s. It just can’t. And that’s ok as it’s an entry level position, and truth be told your O1 isn’t doing much better after student loan payback is considered.

    It’s ok to be a single car household (I tried that one for a few months, it’s easily doable on base), or to have a house full of hand me down furniture. It’s also ok to do without smart phones, cable TV, and cute new outfits for junior.

  • Military Money Management Matters

    Opps hit publish a bit early.

    It’s also ok to do all those things, as long as you aren’t going into debt to do so. It’s a crazy time in the military, and even career fields with re-enlistment bonuses are getting downsized and forced out(which is crazy).

  • Alex

    The author has very good points here. Especially about the difference between qualifying for a loan vs actually being able to afford it. Good advice. I would quantify even further to say that we ought to be working towards a time when our purchases aren’t financed but paid with cash. I am an E4 with a wife who stays at home w/our son and doesn’t work and we have no debt, no student loans, no house or car payments and no credit card debt of any kind. We pay our cards in full each month, evaluate our purchases before we buy them and we never go into debt. We buy used cars and drive them for years rather than get new ones. If we cannot absolutely afford to pay for the new TV, couch, vacuum or car with cash, we don’t get it. And I can’t tell you how un stressed we are to live like this :) The end goal ought not be whether we can afford the payments, but whether we can afford to purchase whatever it is in full without going into debt. Einstein said that compound interest is the 8th wonder of the world. Let’s not be on the wrong side of that.