Nearly 80% of American workers live paycheck to paycheck. It’s no surprise that borrowing money from banks and other lenders has become such a common practice. But is all this borrowing a good or bad thing?
While some people believe you should never borrow money, we believe the answer depends entirely on the borrower. You see, borrowing money can actually serve a purpose other than just putting you in debt. Responsible borrowers use loans and credit cards as a solid way to build up their credit and gain financial responsibility.
If you want to be a responsible borrower, keep reading for our top tips on everything you need to keep in mind when taking out a loan.
Are You Taking Out a Personal Loan for a Good Reason?
The first question you need to ask yourself when taking out a bank loan is “Why?” What are you planning on using the money for? While we totally understand the appeal of financing luxury items (electronics, recreational equipment, fancy appliances, etc.), they’re not necessary.
Moreover, you’ll end up paying hundreds, if not thousands of extra dollars in interest for those things over the life of the loan. We suggest taking steps to improve your spending habits and save up for big-ticket items. However, if you need a personal loan because of veterinary emergencies, auto repairs, home repairs, or other emergencies, that’s a different story.
What Are the Rates and Terms of the Loan?
Regardless of why you’re borrowing money, there are certain things you need to pay attention to in order to protect your financial future. For example, the interest rate and terms of the loan. As a first-time borrower or someone with poor or little credit, expect to have a higher interest rate.
The higher your interest rate, the more money you’ll pay outside of the principal amount. For example, a $5,000 loan with a 10% interest rate over five years would cost you over $1,300 in interest alone. You can improve the rates of your loan by finding a co-signer with decent credit history, offering up collateral, or spending time to improve your credit score.
Are There Any Penalties for Paying the Loan Off Early?
Another important question to ask when taking out a loan is if there are any penalties associated with early payoffs. After you take out the loan and make several payments, you may find it in your best interest to make bigger payments to pay off the loan sooner, rather than later. While this can end up saving you tons of money in interest, you need to make sure the lender won’t penalize you for paying off and terminating the loan early.
Can You Afford the Monthly Payments?
One of the most important things to determine before borrowing money is how much you can afford on monthly payments. As mentioned above, the majority of Americans live paycheck to paycheck, primarily because they have so many monthly payments to keep up with. Remember to keep in plenty of buffer space, never max yourself out.
What Do You Need to Take Out a Loan?
Finally, let’s talk about what you need to take out a loan. While typically, we would suggest having a decent credit score, you can get poor credit personal loans. As far as documents, here’s a quick list of the common documents that you should present to the lender:
- Identification and contact info
- Proof of income
- Recent tax return documents
- Employer information
- Bank/credit statements
Your experience may differ but bringing the above items should prepare you for even the most demanding lenders.
Are You Thinking About Borrowing Money?
If you’re considering borrowing money, we urge you to think about the long-term effects of the loan. Make sure you’re making the best decision for your present and future. And if you’re looking for more information about loans, be sure to check out our loan archives, which is full of valuable information about borrowing money.