What to Consider Before Borrowing Money

Borrowing money is a part of modern life. Some people do it casually with credit cards, while others borrow for specific purposes, such as a car loan. Yet, the borrowing trend is also part of the reason that the average household in the U.S. carries around $155,000 in consumer debt.

While the decision to borrow money isn’t necessarily good or bad, there are ways that you can make smart decisions about borrowing money. Keep reading for the things you should keep in mind before you get a loan or take out a line of credit.

Your Budget

One of your very first considerations before getting a loan or borrowing money is your budget. Specifically, can your budget realistically afford this new monthly payment? Mind you, that is an entirely different thing from, can your budget theoretically afford a payment if you cut out some things?

Most people don’t enjoy that much wiggle room in their budgets. Once they account for all of their bills, food, savings, and some kind of entertainment, there isn’t much left. That leftover bit is what you should base your decision on for any kind of non-critical loan.

If you’re angling for some kind of luxury and the budget can’t support it, save up for a while. The only time you should consider trimming other things out of your budget for a loan is if some kind of emergency crops up, like medical bills or a critical car repair.

Racking up more debt just for a new toy isn’t a practical financial strategy.

The Type of Loan

You must also consider the type of loan. Let’s say that you head over to Kingcash Website and take out a $300 personal loan. For most people, that’s a low-risk move. That kind of personal loan in amounts that small comes with pretty small payments. They also don’t include a lot of strings. If you don’t pay, you might find a collections agency calling, but that’s about as bad as it’ll get.

A mortgage, on the other hand, is a very different kind of beast. For one, those loans are huge. You’re facing a substantial monthly payment.

Hopefully, you can offset that payment by moving out of whatever place you’ve been renting.

Mortgages also come with a lot of strings. For example, your lender might insist on mortgage insurance. That’s an extra payment that you might not have included in your original calculations.

Beyond that, the house itself is the collateral for the loan. If you don’t pay that loan, you can lose your home. Always make sure you understand the terms of a loan before you take it.

The Interest Rate

Something else you must bear in mind is the interest rate you’ll pay on the loan. Interest rates can add staggering amounts to how much you’ll pay overall over the life of the loan. Let’s use a simple example and say that you want a personal loan for $5000 paid back over two years. Banks use your credit score to assign interest rates for personal loans.

Let’s say that you have a great credit score of 825. The bank assigns you a 10 percent interest rate. You’ll pay approximately $514 in interest on that loan for a total bill of $5514.

Let’s say that you have a less stellar credit score of 615. The bank assigns you an interest rate of 25 per cent. You’ll pay approximately $1256 in interest for a total bill of $6256. With no difference except the interest rate, you end up paying around $31 more per month and around $742 more overall for the same loan.

The Duration of the Loan

Another factor you shouldn’t lose sight of is the duration of the loan. Most loans use a fixed repayment period, but you often get a choice about the length of that repayment period. Take that $5000 personal loan from above. 24 months is a pretty typical repayment period, but you could potentially get one for 12 months or 48 months.

Changing the length of the repayment period can change several things. If you make the repayment period shorter, you get higher payments but pay less interest. Make the repayment period longer and you’ll get a break on payment size but take a hit on the amount of interest you’ll pay over the life of the loan.

In the case of a loan like a mortgage, you often get very limited options for repayment. Repayment periods of 15 years and 30 years are the most common, although you occasionally see lenders offering other choices. The choice between a 15-year mortgage and a 30-year mortgage will make a profound difference in your monthly payments and total interest.

Your Job Security

You must also weigh your job security when considering whether or not you should borrow money. For smaller loans that have shorter repayment periods, feeling a little less certain about your job is likely okay. As long as you’re relatively confident you can get a similar job with similar pay, it will probably work out.

For long-term loans, like a 5-year auto loan or a 15-year mortgage, you should feel very confident that you can keep your job or get a better one. Otherwise, you risk finding yourself in debt you cannot possibly handle. That can end with some ugly outcomes, like vehicle repossession and home foreclosures. While no one can know for sure that their job situation won’t change, you should make things like loan decisions based on your best guess about your job situation.

Borrowing Money and You

Borrowing money is such a common event in modern society that most people take a casual attitude toward it. They get new credit cards or take out loans without really thinking through all of the factors.

You should spend at least a little time thinking about things like your budget, the type of loan you want, and the interest rate on that loan. Depending on the type of loan, you should also consider the loan’s duration and your own job security.

Looking for more finance info? Check out the posts in our Business section.


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