Whether you’re seeking financial help for education, medical expenses, or a large home or auto purchase, borrowing responsibly is critical. Being well-informed on both the options available for loans and the terms of your specific loan is a must, and any missteps can lead to significant financial trouble in the future. Interest rates, repayment terms, and fees and penalties can be challenging to navigate for newcomers, so developing a baseline of financial proficiency is essential. Make sure that you have the answers to these four crucial questions before borrowing money.
How Will Borrowing Impact Your Credit?
Applying for a loan can impact your credit, but the extent of the change (and whether it will help or hurt your credit score) depends on a few factors. In some situations, borrowing money can improve your score in the long term. However, if you already have a high degree of credit utilization, applying for a loan may make your score dip.
Which Loan Is Most Appropriate For Your Goals?
There are plenty of lenders, loan types, and specific terms available for borrowers, and finding the right loan is absolutely essential. Even loans for the same amount from a single lender can have significantly different totals if they are subject to different interest rates. You may not need a loan at all; some people choose to apply for a credit card if they need to borrow money, and cards with a low APR can be an excellent choice if you pick wisely. Whichever route you take, be sure to explore all of your options and choose one that you can afford.
How Will The Loan Affect Your Budget?
Many people apply for loans or credit cards to create a bit of wiggle room in their budgets, but loans can be a significant expense on their own. Determine how much money you will need to pay each month to pay off your loan on time, and make sure you can afford it before you sign on the dotted line. This part is critical — falling behind on your payments is a surefire way to wreck your credit score, pay more in interest, and potentially enter a cycle of debt.
What Risks Are Associated With Borrowing?
Make sure to familiarize yourself with all of the fine print for your loan before you commit. There are plenty of risks whenever you borrow money, and you should know all about them before you sign. Are late fees are applicable? When does each payment need to be made, and how? Do you need to begin repaying immediately, or is there a grace period? These questions and more should be on your radar, and you should be confident in your ability to successfully repay your loan on time and in full before borrowing, carefully weighing all of the pros and cons.