Defensive Financing Strategies for Protecting Your Wealth

by Gary Foreman

Preparing for the unexpected now can help you avoid financial accidents later. Start using these defensive financing strategies when you must borrow money and protect your wealth.

Back when I learned to drive, we were introduced to a concept called “defensive driving.” The idea was to expect the unexpected.

For instance, if you anticipated the driver in front could suddenly stop, you’d be prepared to handle it if it occurred.

I still use the strategy today and I’m sure that it’s helped me avoid accidents. It occurs to me that “defensive financing” could help protect our money. Anticipating how things could go badly is a good way to avoid financial accidents.

Let’s take a look at some ways that we can use defensive financing to protect our wealth.

Strategy #1: Auto Financing

For our first defensive financing technique, let’s look at auto financing.

The length of auto loans continues to increase. The reason is simple: people want lower monthly payments. But there’s a catch. Longer loans mean that you owe more than the car is worth for a longer period of time. Back in the day of the three year auto loan your payments generally outpaced the car’s declining value.

With the advent of six and seven-year auto loans, that’s no longer true. Today, roughly one-third of the people buying a new car are “upside down” and owe more than their ride is worth. And, on average, they’re upside down by about $6,054!

You might be thinking that’s no big deal. You’ll keep your car six years or more. OK. But what happens if you have an accident in the first few years and total the car? The insurance company will cut you a check for the value of the car, which won’t be big enough to pay off the loan.

What’s the auto defensive financing strategy? Keep your auto loans to three or four years. That way, you’ll be upside down for a shorter period of time and for less money.

Related:

• How To Never Have Another Car Payment
• Getting the Best Deal on New Auto Financing
• Upside Down Auto Loans: When You Owe Far More Than Your Car Is Worth

Strategy #2: Credit Card Financing

Now for our next tool, credit card defensive financing.

We’ve all seen the guy who looks like he’s about to swerve into your lane. He’s in his lane now, but you sense that he might suddenly invade your space.

Credit card debt can work the same way. You can handle your monthly payment. And, you’re not too close to the credit limit. But what would happen if the interest rate on your card suddenly swerved from 15% to 23%  (like we saw with the increased interest rates in 2023)? You could have a financial accident on your hands.

It could happen. A few late payments could trigger any new purchases to be charged at a higher rate. And, to make matters worse, your payment would be going to repay the older, lower interest charges first.

If you’re like the many families that carry a significant balance, that would be a problem. By the time you paid the old, lower interest charges, you’d be paying an extra $100+ each month in interest alone.

What’s the credit card defensive financing strategy? Either make absolutely sure that your payment is on time or do what it takes to pay down your credit card balance.

Strategy #3: Home Buying

Next, let’s try some homeowner’s defensive financing.

Seems like lately everyone wants to own the largest home possible. The McMansion is in.

No problem, right? Maybe not if everything goes according to plan.

But what happens if energy costs increase by 50%? The bigger the house, the more energy it takes to heat or cool it. Could you keep your budget from crashing if the summer electric bill went from $200 to $300 a month?

Or the county commission could raise property taxes. Bigger, more valuable homes will see the biggest increase. Same thing if homeowners insurance rates get a boost. In this case, bigger is not better.

The housing defensive financing strategy is to only buy as much house as you need. If you find that you need more space later, you’ll have options available to you. And, the money to do something about it.

Related: Things To Consider Before Deciding to Buy a Bigger House

Strategy #4: Mortgages

Finally, have you noticed how dangerous people are when they drive and talk on the phone? Seems like they forgot that the purpose of driving was to get somewhere safely. Not to visit with someone via phone.

Our mortgage defensive financing skill relates to a similar issue. There was a time when people expected to pay off their mortgages. The purpose of a mortgage was to allow them to pay for a home over a period of time, usually 30 years.

Ah, but that was before a whole slew of new mortgages were invented. Their purpose? To allow for the biggest loan possible for the smallest monthly payment. They do it with variable rates, negative amortization, balloons and 50 year maturities.

What’s the problem? Nothing if you’re able to keep up with your payments and the housing market goes up. But, if interest rates increase by 1/2% per year for three years on a $200,000 mortgage, your payment will increase by $250 per month.

Or if housing prices drop and you need to sell before they bounce back, you could be “upside down” in your home. Sell your home? It’s not easy for the seller to bring a big check to the closing table.

How can you protect yourself? Same as when you see someone talking and driving. Avoid them as much as you can!

• How We Saved $34k in Interest on Our Mortgage Before Closing
• Managing Your Mortgage To Build Wealth
• 5 Ways To Save on Your Mortgage

Defensive financing, just like defensive driving, isn’t complicated. Just a matter of preparing for the unexpected so that you can avoid accidents.

Hopefully, all your financing miles will be happy ones!

Related:

• Debt Warning Signs You Shouldn’t Ignore
• 10 Secrets to Attracting and Saving Money
• Prescriptions for 5 Common Financial Ailments
• 10 Easy Steps To Ensure Financial Failure

Reviewed March 2024

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.