6 Top Tips For Wise Borrowing

Research has shown that the majority of Americans have some form of consumer debt to pay off. This debt is typically in the form of mortgages, car loans, or unsecured personal loans. 

If you are also looking to borrow funds in order to meet your personal needs, then you should make sure to follow certain best practices. This article will list the dos and don’ts of borrowing money, and show you the tips that will help you avoid falling into a debt trap.

Dos And Don'ts

No matter what you are borrowing for or what your credit status is, there are a number of things you should always do and also specifically avoid. Whether you are applying for a mortgage with a perfect credit score, or applying for installment loans for bad credit, below are the tips and tricks you should keep in mind.

Do: Negotiate Rates

The first and foremost tip is to make sure that you negotiate interest rates as much as possible. These negotiations are an important part of the borrowing process irrespective of the type of loan, and they will go a long way towards reducing your interest burden in the future. 

You should always compare the interest rates listed on lenders’ websites before making an inquiry. This will give you a point of reference and leverage when negotiating with your lender.

Do: Make More Than The Minimum Payments

You should always try to make more than the minimum payment and also look to see if you can make payments more frequently. If your loan terms state that you should make a minimum of one payment per month, ask if you can opt for bi-monthly payments. This will help you in reducing your overall payment timeline. 

For example, if your monthly loan repayment is $100, you will end up paying $1200 per annum by making one payment per month. However, if you were to make one payment of $50 every two weeks, you will be debt free in 48 weeks. These small changes can have a big impact overall when you consider the savings in interest payments.  

Do: Keep Your Credit Utilization Ratio Under 30%

The credit utilization ratio is defined as the percentage of credit that you are currently using out of the overall funds available to you. This ratio has a direct bearing on your credit score, so you should keep an eye on it at all times. 

In general, a credit utilization ratio in excess of 30% has a negative impact on your credit score. A nifty trick is to open up more credit availability through a new credit card. You should then spread your debt across your cards. As long as you don’t spend more, your utilization ratio will go down.

Don't: Borrow More Than You Can Afford To Pay Back

In addition to the above dos, there are also several don’ts. The most obvious is that you should not borrow more than what you can afford to pay back. It seems obvious, but a lot of people make the mistake of borrowing too much money and then regret their decision later on. 

For example: You like the rates and terms on offer from your lender and think that having some more ‘cheap money’ in your bank account will help you feel more financially secure, without having a real purpose in mind for the extra cash. This money often gets frittered away on unnecessary purchases, adding to your debt burden, and unnecessarily raising your debt-to-income ratio.

Don't: Jump In Without Reading The Fine Print

Another common mistake people make is to sign up for a loan without reading the terms and conditions properly. This mistake could cost you big time, resulting in unjustified penalties and increased debt burden. 

You should never take out a loan in a hurry. Instead, you should be reading the terms and conditions in great detail, including clauses related to debt modification, repayment terms, as well as possible penalties. If you have any doubts then make sure to ask your lender.

Don't: Borrow From Too Many Lenders

Finally, it is also important to ensure that you are not borrowing money from too many lenders at once. This is a mistake that impacts your creditworthiness over the long run. Building a good reputation and creditworthiness with a primary lender will make it easier for you to continue to borrow at favorable rates.

Conclusion

In short, you need to be extremely careful while borrowing money. You should always try to negotiate the rates as far as possible, while also checking the terms and conditions. In addition, keeping track of your credit utilization and debt-to-income ratios will help you maintain good credit health.