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The Basics of Borrowing Money


Borrowing Basics

People generally borrow money for big purchases, such as homes, cars, businesses, and/or education.  These items cost more than one paycheck and could be difficult to save for within a reasonable amount of time. But, before taking on a loan, it’s important to understand some of the basics of borrowing money.

The first step is to make sure you really need the loan.  Are the benefits of of what you will receive - for example, a home or car -- outweigh the monthly payments you will have to make for the next three to thirty years?

Then, you need to make sure you understand the loan and key borrowing terminology. Be sure you understand the the interest rate, fees, and other charges. You will want to know when your payments are due and how to make your payments.You will also want to know about the possible penalties for making late payments or repaying the loan early.  And, you will want to know who you should contact if you have any questions about your loan.

Finally, you will need to make 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.

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.

Tools to Help

Key Borrowing Terminology

A list of key terms used by lenders

Learn More

Evaluating Loans

How to pick the right option for you


Evaluating Credit Cards

Picking the one that is right for you


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Here are some things you can do to make those big changes happen today, next week, and during the next few months.
  • Today
  • Get to know borrowing terminology, which will help you make informed borrowing choices. It can also empower you to talk with lenders.
  • Next Week
  • Use “Evaluating Loans-How to Pick the Right Option for You” to make sure that you are getting the best deal.
  • During the Next Few Months
  • If a credit card is a better borrowing option for you, choose one that works with your lifestyle and budget.