There are several tips for smart borrowing. Applying for a loan is practically a necessity, especially since most people cannot purchase a car or house outright. Although borrowing money is commonplace, you can easily get trapped in a bad loan. Fortunately, you can take steps to receive favorable terms. Before borrowing money, here are seven tips for smart borrowing.
1. Check Your Credit
Looking for the best tips for smart borrowing? Check your credit score before you apply for financing. This three-digit number determines whether you are approved for a loan, as well as your interest rate on the loan. The higher your credit score, the more you're able to borrow from a lender at a reasonable rate. This can affect how long it takes to pay back the loan, and how much you pay over the life of the loan.
2. How Much do You Need?
If you qualify for a huge amount, you may borrow the maximum. Understand, however, borrowing the maximum increases your monthly payment. This can create an unnecessary financial burden. Borrow only what you need and can reasonably afford to pay back.
3. Shop around
Do you shop around for the best deals on clothes and shoes? If so, put the same amount of effort into finding the perfect loan. Loan terms and rates vary by bank. Shop around and you can receive the cheapest rate on your loan. Contact at least two different banks and request a no-obligation quote.
4. Understand the Terms of the Loan
Not all loans are created equal. Plus, terms can vary by bank. Before signing a loan agreement, read the contract carefully. What is the interest rate? When is the loan due? Is there a grace period? Is there a prepayment penalty? Knowing the terms can help you determine whether the loan is a good or bad deal.
5. Get Everything in Writing
Maybe you borrowed money from a relative or friend. This is an easy way to get a low or zero-interest loan. Always put loan agreements in writing. This can work to your advantage if problems arise. This agreement should detail the loan amount, the due date, length of the term and any interest charges. Both you and the other person sign the agreement. If there is a misunderstanding, you can refer back to the contract.
6. Save for a down Payment
Down payments are not always required on vehicle loans and personal loans. However, a down payment can result in a shorter repayment term, as well as lower monthly payments. The more you put down, the less you need to borrow. Down payment amounts vary. For example, if you are financing a new car, you might put down 20% or 30%.
7. Develop a Plan to Pay off the Debt
Pay off your loan early and you'll save money on interest payments. Let’s say your loan has a five-year term. Create a plan to pay off the loan in less time – perhaps two or three years. You can make higher payments each month, or send a double payment a few times each year. Paying off the debt early not only frees up cash, but raises your credit score.
You don’t need to be a financial expert to make smart borrowing decisions. You cannot renege on a loan once you sign the papers. Therefore, it’s important to obtain a loan with terms you can live with. What tips do you have for smart borrowing?