5 Things You Must Do Before Borrowing Money

November 3, 2020

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5 Things You Must Do Before Borrowing Money

Loans help people in more ways than one. It helps with getting through bad times or when emergencies arise that require financial assistance. However, while there are many loans readily accessible to the public, there is a risk entailed with getting a loan: a debt that you have to pay off.

If you want to borrow money, and utilize it in the most responsible way possible, here are the things you must do before applying for a loan.

Select Where to Borrow Money

There are many ways on how to borrow money, as well as where to borrow money. You have several options, such as banks, credit unions, online lenders, or only borrowing from your peers.

Banks

Banks are usually the go-to for loans. This is because most people have bank accounts for their savings and salary, and having bank accounts will bring you several benefits with other services, such as providing loans.

Credit Unions

You can also borrow money from your credit union. These are financial cooperatives that are driven by members and are a non-profit organization that enjoys tax-free status. Members pool their money that serves as the shares that they can buy to fund financial services, such as money lending, that they could apply for. They have lower interest rates and more access to ATMs.

Online Lenders

Online lenders are a great way to borrow money, as they are quick and convenient. Borrowing money at traditional banks may take a long time, especially the approval process, but online lending can be done in a few clicks.

Peer Lending

This is the simplest way to borrow money. You could ask people you know if they could lend you cash, especially family and friends. However, even if it is less time consuming and convenient, you still need to be responsible for the money that you borrowed by guaranteeing your peers on when you could pay them back and the means you could do so.

Improve your Credit Score

One of the requirements for you to borrow money from financial institutions is to have a high, or good credit score. The reason for this is that a credit score represents one's creditworthiness or the borrower's tendency to pay back the lent money. Having a high score generally means you are responsible enough to pay off your credit and trustworthy enough to be granted another.

There are still lenders that grant loans to those with bad credit, but they have imposed limits. Some lenders may not grant any loans to them at all. Having a bad score makes borrowers look like they have not paid off their debts in due time. If you have a bad credit score, you need to improve it to have better loan opportunities.

Clear Off Other Debts

One of the reasons people have a bad credit score is because they have more than one unpaid debt. Having several unpaid debts is harmful to your credit history, because you won’t be granted other loans when you need it. You may be unable to balance your finances for your daily needs. This will only make you get another loan. Hence, you must sort out your financial responsibilities and be more responsible with your money.

It would be best to pay off your other debts before you plan to apply for another one. You can start by paying off the earliest debt and then the later ones. Try paying off the most expensive ones first to gradually ease the burden of your debts.

However, it is fine to go for a loan if you have other loans that aren’t money. There are loans for other assets, such as homes and vehicles. These loans are typically long term, which can span for more than a decade. Payments for these loans are fixed and are often not paid in advance.

Look for a Way to Repay Your Loans

Before you take out a loan, you must find a way to consistently pay it off. There are several loans where borrowers pay off the loan in monthly installments. Some of them are fixed, while some can be paid off before the due date.

While in debt, you need to have a consistent source of finances to pay off the loan. The most common ways are through salary and profit. A good idea would be utilizing the borrowed money for business and then paying it back through the profit. If it sells well, it could even grow to provide enough money for your needs to the point that you wouldn't need to borrow money anymore.

Secure a Collateral

There are two types of loans: secured loans and unsecured loans. Secured loans are the type of loan where you pledge your assets as collateral. If you cannot pay off the debt, the lender will take the collateral instead. On the other hand, unsecured loans are those that don’t require collateral. Failure to pay the loan in due time will cause a reduction in your credit score.

Those with high credit scores can get unsecured loans, while those with lower scores may only get secured loans. Criteria may vary depending on where you will take a loan, so it’s best that you need to secure collateral to be prepared. It may be a vehicle, your home, or anything of value like jewelry.

Takeaway

Borrowing money from financial institutions requires responsibility and the promise of paying back the amount that was borrowed. Before taking a loan, you need to be prepared to have hassle-free transactions and spending in the long run.