Five Questions to Ask Before You Borrow
A college education. A new home. Medical bills. Relief from high-interest debt. There are a lot of good reasons to borrow money. But before you take out any loan, there are some important questions you should ask. Let's take a look at five of them:
- Does a loan make sense right now? You may want to borrow to buy a home or purchase a car but is now the right time to get the loan you need to make it happen? That depends on several factors, not the least of which is your budget. Do you have room for a loan payment in your monthly budget? The best way to determine that is to take an honest and careful assessment of your finances.
- What's the best loan option for you? Today, there are no shortage of loan options. The solution that's right for you depends on the purpose of your loan and whether or not the loan will be secured by collateral. For example, if you own a home, you may be able to qualify for home equity credit, which uses your home as collateral and gives you the flexibility to borrow for a variety of reasons. If you don't own a home, you may want to take out a personal loan, which is unsecured.
- What's the cost? If you spend any time researching loans, you'll see that rates and fees vary considerably by lender and program. The best way to measure the cost of borrowing is to look at the Annual Percentage Rate or APR. The APR measures the yearly cost of funds, including fees. You should also know if the interest rate on your loan is fixed or variable. With a fixed-rate loan, your interest rate doesn't change, which gives you the benefit of predictable monthly payments. In contrast, variable-rate loans, which are tied to an index, could result in higher monthly payments. Another factor that will impact your monthly payment is the term or how long it will take you to repay your loan. In general, the longer the term, the lower your monthly payments will be, but the more interest you'll pay over the life of the loan.
- How much do you really need? You may be looking for an auto loan to help you buy a dependable car. You may, however, qualify for a larger loan that could land you a luxury car. Remember that borrowing more means higher monthly payments, so be sure to determine just what you need to reach your goal and stick to your budget.
- What's your credit score? Your credit score will determine whether you qualify for the loan and the interest rate you will receive. In essence, it helps a lender determine your ability to pay the loan back. You could obtain your credit score from your credit card company or from free credit score services. If your score is low, you may want to consider holding off on borrowing until you can raise it.
Getting a loan is a big decision, so make sure you carefully understand your goals and options even before you sign on that dotted line.