Only a handful of people go through life without ever having to borrow money. For the rest of us, we will need financial help at some point. And usually, borrowing to fund our needs becomes the only viable option available.
Borrowing to fund your needs could be a good thing, especially when you need the loan to acquire assets that appreciate in value – like to pay for a college education or buy a property.
It could also turn into a nightmare, if you only borrow to fund consumption – for example, to pay for a vacation or entertainment.
So, when it is time to take out a loan, do these 7 things to borrow money wisely.
Borrow only when it makes sense
This seems like common sense but you would be surprised with the number of people that have turned to taking out a loan as their first option whenever they need extra cash.
Borrowing should be the last resort after you have exhausted every other means to raise money to fund your needs.
Even at that, be sure the loan is for things that would either gain value over time or start generating income as soon as possible – the bottom line is, borrow money to acquire assets.
Only borrow what you can pay back comfortably
You do not want to be weighed down with debts, even if your income/debt ratio allows you to borrow more.
Remember, aside from servicing the loan, you still have other obligations. You will need to pay for the utility bills at the end of the month. There are grocery runs to make every week. Your health insurance premiums still need to be paid, and other loans still need repaying.
So, you might want to consider these other responsibilities plus the additional monthly repayments before taking out a new loan.
Can you conveniently make the monthly payments without defaulting on existing expenses?
Shop around for best terms
Thankfully, there are several organizations you can go to for a loan. And, often these firms, offer varying terms and interest rates.
You may want to check out a couple of these financial institutions to find one with the best deal for your unique situation or when choosing the right car loan.
Pay attention to the repayment terms, interest rates, and other charges associated with the loan. Look out also for penalties associated with the loan. Can you pay back the loan early without triggering being fined? How much are you going to pay if you default on your payment?
Run some numbers and compare the results for each of the contracts you have penned down. Go with the one that offers a better deal than the rest, so you do not have to pay too much throughout the loan’s term.
Understand your credit score
While shopping for the best offers, you may also want to review your credit reports. Your credit score is a major factor which impacts how much interest most lending organizations will offer you.
A good credit score of, say, 700 and above will put you in a better position to negotiate for a favourable loan term. You may even get the loan at zero interest.
Request a free credit report from the credit bureaus – you are entitled to one free report from each of the credit bureau in a year.
Be aware of how much the loan will cost you
You see, it is not just the lump sum you borrowed you will be paying back. You will in addition to the loan amount pay interest. The interest might range from 1.2% to over 10% depending on your credit score and the organization lending you the money.
There is the processing fee, administrative or initiation charges you will also have to pay.
Then, for most loans, a penalty is attached to the loan which is triggered when you either default on your payments or pay back the amount early.
So, you may want to be 100 per cent sure that you understand the exact dollar amount you will be paying on the loan and plan accordingly.
Pay due bills on time
Paying due bills on time is an excellent way to improve your credit score which in turn helps you get better rates and loan packages. It is also a great way to avoid the extra cost of penalties.
Diligently paying down the loan ensures you only get to pay back the loan amount and interest.
Start saving before you need to borrow
Developing a saving habit could in the long term help you receive the best offers when its time to borrow since you will require only a smaller amount to top-up your savings. Or, it could even eliminate the need for a loan in the first place.
For individuals with a retirement plan, you can easily take out a loan without much questions asked. Though there is a limit on how much you can borrow, as soon as you repay the loan, the money is returned to your savings account.
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