The Basics of Borrowing Money
People borrow money to help them afford homes, cars, businesses, and education. These items generally cost more than a person can pay for out of one paycheck or even save for within a reasonable amount of time. Before taking on a loan, it’s important to understand some of the basics of borrowing money.
The first step is making sure you really need the loan. Once you've decided to take out a loan, make sure you understand the loan and key borrowing terminology. Be sure you understand all of the costs associated with the product, such as the interest rate, fees for late payments, penalties for repaying the loan early, and any other charges that may apply. You will want to know when your payments are due and how to make your payments. And, you will want to know who you should contact if you have any questions about your loan.
Be sure you qualify for the loan. Most lenders will want to see:
- proof of stable income,
- adequate savings,
- a good credit history, and
- proof of any collateral securing the loan.
The lender will also calculate your debt-to-income ratio to make sure you can afford the new monthly debt payment.
While lenders will approve you up to a specific amount, consider borrowing less than the allowed maximum. This gives you a little cushion if your income should suddenly change.