There are several things you need to know when it comes to borrowing money. You can learn more about some of our best tips here.
About a third of families that earn between $25,000 and $125,000 are having trouble making ends meet.
This is mostly due to coronavirus, but it shines a light that many families are turning to other means to pay the bills. They’re turning to loans and credit cards to get by.
If you find yourself in a similar situation, you’re likely to turn to loans. When you’re borrowing money, you could find yourself in a much worse financial situation than before.
Read on to learn how to take out a loan the right way with these top tips.
Have a Specific Purpose
Your loan has to have a specific purpose. This is when it’s necessary to separate needs from wants. Do you need to borrow money to pay bills? Do you want to borrow money to buy a new TV set because you’re spending more time at home?
It’s important to separate the needs from the wants so you can make a smart financial decision. You’re going to carry this loan for a few years and it should be on something that’s necessary.
The only exception to this rule is if you’re planning to use the funds on something that will make money. You can use the funds to start a new business. That will generate more income for you and can be a smart financial move.
Don’t Take Out More Than You Need
Not only do you need a purpose for the loan, but you have to have a specific amount in mind. This will ensure that you’re not getting yourself deep into debt.
This is also why you need to have a purpose for your loan. If you’re using the loan to pay off your bills and to stay afloat, consider the bare minimum you need to get by and for how long.
That’s how much your loan should be.
In the case of starting a business, create a bootstrapped budget. This is the minimum you need to get your business off the ground.
In both cases, you’ll be able to prioritize expenses and leverage your loan in the best way possible.
Check Your Credit Score
Before you start applying for a loan, you have to know where you stand financially. Take a look at your credit score because this will tell you if you can get approved for a loan and what you’re interest rate will be.
It will also indicate if you have errors on your credit report. You’ll need to get these errors cleared up before you start to apply for loans.
Shop Around for Loans
It seems like everyone offers personal loans. That’s great because it gives you more choices and you can shop around for the best deal. You can start with your personal bank and then turn to online loans to compare them.
You don’t want to complete an application for a loan until you’ve compared lenders. You want to get pre-qualified first. This will give you a ballpark estimate of the interest rate and loan terms.
Prequalification involves a soft credit check, which doesn’t impact your credit score. Once you have your lender, then apply and get the hard credit check.
Look at the Full Amount of the Loan
It’s easy to compare loans and only think about the monthly payment. That doesn’t tell you everything about the loan. You could be paying hundreds more in interest because you didn’t look at the big picture.
You want to look at the total cost of the loan. This is the total principal amount and the total amount of interest for the life of the loan.
Read the Fine Print
Lenders aren’t always going to be transparent about fees, so it’s up to you to read the fine print of the loan. Common fees are administration or origination fees to process the loan.
Some lenders may add repayment penalties if you pay your loan back early. These fees are usually rolled into your monthly payments, so you don’t notice them.
However, you want to know what they are and question the lender about them before you sign.
Make a Repayment Plan
You want to make sure that you can pay back the loan, even in tough times. You could be stuck in a cycle where you’re borrowing money to pay back a loan.
You want to check your budget and make a plan to repay the loan. You can repay it faster by paying more than the minimum amount.
Always Make Payments on Time
You can’t afford to make your loan payments late. Some lenders will have a short grace period, then after that, your credit score will take a hit.
That can impact your ability to get access to credit in the future. Know when your payments are due and schedule your payments in advance.
Understand the Long-Term Consequences Before Borrowing Money
We are in times of economic uncertainty, even though the stock market seems to be going up. On the surface, things seem to be going great, but another shutdown can cause things to take a turn for the worse.
Envision yourself with this monthly payment 6 months and 3 years later. You have to ask yourself if it’s worth it or if there are other ways to make ends meet in the short-term.
Borrowing Money the Smart Way
There are times when borrowing money is necessary. For many people, this is one of those times as income drops, and jobs are lost. If you do need to take out a loan, follow these tips to protect your financial health now and in the months and years ahead.
Have a specific purpose for the funds, shop around for loans, and have a plan to repay the loan back as soon as possible.
You’ll be able to maintain your credit score, and even bring it up when you handle your new debt responsibly.
For more tips to get out of debt fast, check out the tips to eliminate debt on this site.