Jul 12, 2023
Contributing regularly to your savings is Personal Finance 101. But even diligent savers can’t plan for everything. You might find yourself facing a large, unexpected home repair. Or maybe you’ll decide to invest in retraining so you can switch jobs and increase your income.
Either way, when you have expenses that your savings won’t cover, you will probably want to explore some of the different ways to borrow money.
There is more to borrowing money than finding a lender, signing on the dotted line, and receiving the funds. Most important, you need to understand the total cost of borrowing so you can choose a loan that will help you reach your financial goals.
So, before you apply for a loan or borrow from other sources, be sure you have considered these 10 things.
1. You need a reputable lender
2. Borrowing from family or friends can be tricky
3. The total cost of borrowing is more important than interest rates
4. The reason you want to borrow matters
5. Making a repayment plan may help you pay off debt faster
6. There are many different ways to borrow money
8. Prioritizing your spending is a must
9. It’s smart to limit what you borrow
10. Patience is the key to reaching financial goals
It might sound obvious, but this is a point worth emphasizing: You will want to look for a bank or online lender with a good reputation. As with any other product or service, reading online reviews is a great way to gauge other people’s experiences with a lender.
You can also compare top lenders and rates on sites like NerdWallet. Always be sure to avoid untested money-borrowing apps and payday lenders, which can charge annual percentage rates (APRs) of up to 400%. As a reference, Discover® Personal Loans offers a fixed interest rate from 7.99% – 24.99% APR.
While you might love and trust friends and family members, unpaid debt can damage relationships, sometimes irreparably.
If you decide to borrow from someone you know, make the transaction as clean as possible by drawing up a written agreement with set payback terms. Keep in mind that a written agreement is not only a good idea to protect your relationship, but the IRS has certain rules about loans, even between family members, to ensure the loan is not treated as a gift.
Of course, it’s best to avoid borrowing from people in your circle if at all possible. Instead, seek out a bank or nonprofit credit counselor to go over your options.
One solution could be a personal loan. A personal loan could save you money on interest compared with putting that unexpected expense on a higher-interest credit card. Plus, you’ll be able to manage your debt payoff with a set regular monthly payment that fits your budget. As a bonus, you won’t risk hurting your personal relationships.
Whether you are thinking about borrowing from a bank or using a credit card, make sure you know what it will really cost to borrow money. You can do that by learning about the difference between APR and interest rates. This will help you better understand the total amount you will pay in interest and fees over the life of the loan.
In other words, knowing the total cost of borrowing for any of the loans you are considering will help you identify the cheapest ways to borrow money.
You never want to borrow money just to borrow money. You should have a clear idea of why you need the funds. For example, do you want to consolidate debt at a lower rate, pay medical bills, or pay for a home repair or remodel project?
Whatever it is, make sure you know exactly how much you need so you can borrow close to that amount. If you take out a loan that’s larger than you need, you will end up paying more interest overall.
Before you get the funds, make a plan for paying back the money. That way, you can minimize the impact of the loan on your finances in the short and long term.
With Discover® Personal Loans you get a defined repayment term, one set regular monthly payment, and a clear payoff date. That means you can select a repayment term and get set regular monthly installment payments. This lets you work your payments into your budget, which could simplify your finances and give you peace of mind.
Not all loans are the same. It’s important to keep this in mind so you can choose the right product for your situation, and ideally, borrow as cheaply as possible.
For example, there are differences between a personal loan and a personal line of credit, or between a home equity loan and a personal loan. Knowing the pros and cons of each of your options will help you make an informed decision.
One of the advantages of a personal loan is that it doesn’t require collateral. That is, you don’t need to secure the loan with your house or car. And unlike revolving credit lines, you will know at the outset exactly how long it will take you to become debt-free.
Just as there are different ways to borrow money, lenders might offer different repayment terms, or charge different fees for the same kind of loan. For example, if you are interested in a personal loan, don’t assume that every bank will offer the same personal loan agreement.
Shop around based on APR, interest rate, loan agreement terms, customer service, and the trustworthiness of the lender. You’ll also want to understand what factors can affect the personal loan rates you receive.
Unless you’re borrowing money for one specific expense, you will want to think about your priorities. Should you pay for home repairs first, then medical bills? Or should you pay for education expenses, then tackle projects around your home?
Deciding on your most crucial needs ahead of time will help you get the most out of the money you borrow.
A good rule of thumb is to assess your needs so that you can apply for the amount of money you need, whether you’re looking to consolidate higher-interest debt or finance a major expense.
It would be unwise to borrow more money than you need—especially if you’re not sure you’ll be able to pay it back on time. So, tally up higher-interest debts or large expenses, and apply for that amount.
Whether you are choosing a lender or working on paying down your debt, try to stay patient and follow your plan. A thoughtful approach will help you get the most out of the money you borrow now, and help you reach your financial goals in the future.
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Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third-party or information.
