Article by – Shiv Nanda
Borrowing money is something most of us do at some point in our lives, whether it’s for buying a home, getting a car, or covering daily expenses when our wallets are feeling a bit light. But before you dive into the world of loans, here are the top 8 tips to make sure you’re borrowing money wisely.
8 Crucial Tips to Keep in Mind Before Borrowing Money
1. Trustworthy Lenders Are Key
This may seem obvious, but it’s vital to emphasise: you want a reputable lender. When it comes to your finances, going with a bank or online lender known for their reliability is crucial. Just like you’d read reviews before choosing a restaurant or a new phone, check out what others say about their experiences with a lender. Avoid untested money-borrowing apps and payday lenders, which can hit you with sky-high annual percentage rates (APRs) of up to 400%. Most personal loans offer more reasonable fixed interest rates, ranging from 7.99% to 24.99% APR.
2. Borrowing from Loved Ones Has Nuances
While getting a loan from a friend or family member might seem appealing, it can lead to tricky situations. Borrowing from loved ones can strain relationships, making it uncomfortable for the borrower to ask for repayment. To avoid complications, establish clear rules and put any financial agreements in writing. Additionally, try to maintain open communication about non-financial matters to preserve your relationship beyond the loan.
3. Know Your Borrowing Options
Not all loans are created equal. There are various types of loans tailored to different needs, so pick the one that fits your situation best and doesn’t cost you an arm and a leg. Credit cards, mortgage loans, and school loans are common choices, but don’t overlook personal loans. These unsecured loans can often be a better bet than credit cards, thanks to their lower interest rates.
4. Loan Agreements Aren’t One-Size-Fits-All
Loan agreements can differ from one lender to another. They might offer varying repayment terms and charge different fees, even for the same type of loan. Don’t assume all personal loans are the same; shop around based on APR, interest rate, loan terms, customer service, and the lender’s reputation. Also, understand what factors impact the personal loan rates you’ll be offered.
5. The Interest Rate Matters
The interest rate is essentially the cost of borrowing money. It’s often expressed as an annual interest rate. Ensure you grasp your interest rate and how it’s calculated. For example, payday loans can come with astronomical interest rates, sometimes exceeding 600%. In contrast, personal loans, mortgages, and car loans typically feature much lower interest rates, often less than 10% per year with good credit.
6. Borrow Only What You Need
It’s tempting to take out a larger loan, but remember, the more you borrow, the more you’ll pay in interest, and the higher your monthly payments will be. Be cautious and only borrow what you genuinely need and can comfortably repay.
7. Consider the Repayment Period
This is the timeframe for repaying your debt. A shorter repayment period means you’ll pay less interest overall but have higher monthly payments. If you can manage slightly larger payments, opting for a shorter repayment period can save you money in the long run.
8. Have a Repayment Plan
Before taking on debt, make a clear plan for paying it off. Know how long it’ll take and ensure it won’t derail your other financial goals. This way, you can borrow responsibly without jeopardising your financial well-being.
Borrowing money is a significant financial decision. By following these tips and approaching borrowing with mindfulness and responsibility, you can make informed choices that align with your financial well-being and long-term goals.