What to consider before borrowing money
Responsible borrowing can help you build a good credit history. However, using credit to spend beyond your means is dangerous.
Ask yourself the following questions before borrowing money or using credit.
Is it good debt or bad debt
Good debt describes borrowing that can improve your overall financial situation over time.
- a loan to renovate your home may increase your home’s value
- a student loan may help you to get a job with a higher income
Bad debt describes borrowing to buy things that you consume or that have short-term value.
For example, going into debt for a vacation. You'll be paying for the trip long after you enjoy the holiday.
Does borrowing money fit your budget
Consider the following questions before you take out a loan or a line of credit:
- how much you want to borrow
- how much you can afford
- do you need the money now or could the expense wait until you've saved for it
- how much will you be able to pay back each month
- do the monthly payments fit into your budget
- will you still be able to afford the payments if interest rates change
- what happens if you miss a payment
- do you need loan insurance in case you get sick, have an accident or illness that leads to a disability, die or lose your job
What happens to your loan payments if interest rates rise
If your loan or line of credit has a variable interest rate, your monthly payment may go up if interest rates rise.
Review the details of the credit or loan agreement
Read the terms and conditions of the credit or loan agreement carefully.
Take a close look at interest rates and fees. You may be able to negotiate the interest rate and terms of the agreement.
Lenders must get your consent before adding services to:
- your loan
- your line of credit
- your credit card
Ask your lender about anything you don't understand.
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