Are you interested in borrowing money? Have you taken the time to consider the many available funding sources? Do you know which one is best for you at the present time?
There is more to borrowing money than finding a lender, taking the funds and signing on the dotted line, so be sure you’ve considered these 10 things:
1. Be Careful Who You Borrow From
When borrowing money, it makes good sense to only consider reputable lenders. In addition to doing your homework, be cautious about payday lenders and untested money borrowing apps.
2. Think Twice Before Borrowing from Family or Friends
Only 49 percent of borrowers report repaying a friend or family loan in full. This unpaid debt can damage relationships. As Shakespeare wrote in Hamlet, “Neither a borrower no a lender be; for loan oft loses both itself and friend.” In other words, when it goes wrong, it can go really wrong.
Bottom line: if you’re concerned about your ability to repay the money, it’s best to steer clear of this arrangement. There are plenty of other options, such as a personal loan, that make more sense. You don’t want to jeopardize a personal relationship to get your funds.
3. Understand Interest Rates and the Cost of Borrowing Money
It doesn’t matter if you’re borrowing from a bank or using a credit card, it’s imperative to know how the interest rate works. This will help you better understand how much you’re paying in interest over the life of the loan, or simply put, how much the loan will cost.
The annual percentage rate is essentially the cost of borrowing the money you need. The lender should be able to tell you the rate and how that affects your monthly payment. If the rate is fixed, as with most personal loans, then your monthly payment shouldn’t change as long as you make your payments on time. People with a higher credit score typically pay lower interest rates, which may lower the cost of borrowing.
4. Know Why You Are Borrowing the Money
You never want to borrow money just to borrow money. You should have a clear idea of why you need the funds, such as to consolidate debt at a lower rate, pay medical bills or complete a home repair project. It also helps to have a budget for the expense so that you can borrow close to the exact amount you need. (See #9)
5. Create a Plan for Paying Back the Money ASAP
Before you accept the funds, create a plan for paying back the money. With this plan in place from the start, you’ll know which steps to take to minimize the impact of the loan on your finances (both in the short and long term). With a personal loan from Discover, you could have a predetermined payoff schedule and fixed monthly payments, so you have a clear payoff date.
6. Not All Loans are Created Equal
You should never assume that all loans are the same, as this could lead you toward the wrong product and/or paying more in interest than necessary.
For example, there are some differences between a personal loan and a personal line of credit, as well as between a home equity loan and a personal loan. Knowing the pros and cons of all your options will allow you to make an informed and confident decision.
One of the advantages of a personal loan, for example, is that it doesn’t require collateral (you’re not taking the loan against your house or car).
7. Some Banks Offer Better Terms Than Others
This goes along with point #6 above. For example, if you’re interested in a personal loan, don’t assume that every bank will offer the same payment terms. You should shop around based on interest rate, available terms, customer service and trustworthiness of the lender.
8. Think about What to Pay for First
Unless you’re borrowing money for one specific need, you’ll want to prioritize your spending. Should you pay for home repairs first, then medical bills? Should you pay for education expenses, then tackle projects around the home?
Prioritizing your most crucial needs ahead of time should help you get the most out of the money you borrow.
9. Don’t Bite Off More Than You Can Chew
Just because you qualify to borrow a certain amount of money doesn’t mean you have to. If you need $15,000 and qualify for $30,000, don’t make the mistake of taking the additional money if you’re not sure you’ll be able to pay it back on time.
10. Even if You’re in a Hurry You Should Remain Patient
Whether it’s choosing a lender or methodically paying down the balance of a loan, try to stay patient and follow your plan. This can help you get the most out of the money you borrow and have better financial opportunities in the future.
Suggested reading: Getting a Personal Loan: Common Questions & Answers