The Dos and Don'ts of Borrowing Money - SmartAsset (2024)

Taking on debt is a thorny subject. Signing onan affordable mortgage is one thing. Racking up credit card debt on unnecessary purchases? Quite another. Any time you borrow money, you put your finances at risk. That’s why it’s important to do your research before committing to new debt.If you’re not sure whether to borrow money, read our list of dos and don’ts. And if you need hands-on help managing your financial life, consider linking up with a financial advisor.

What You Should Consider Doing When Borrowing Money

Borrowing money can either be a great experience, like when you’re borrowing to buy your first home, or it can mean you’ve fallen on hard times. Regardless, debt can be difficult to navigate no matter what the reason is so it’s important to understand how it works and what you can do to improve your situation as you repay that loan.

Here are the things that you may want to consider doing when borrowing money:

1. Comparison Shop When Deciding Where to Borrow

Thinking of borrowing money? Don’t just go for the first credit source you can find. Look around for a loan that meets your requirements and leaves you with monthly payments you can actually afford. If you’re not happy with what lenders are offering you, it may be best to take the time to build up your credit score and then try again.

2. Go for “Good Debt”

Good debt is a debt you can afford that you use on something that will appreciate over time. That could be a home in a desirable neighborhood or an education from a reputable institution that will help your future earning power. Of course, you can’t be 100% sure that your home will appreciate or that your advanced degree will pay off but you can take leaps based on thorough research.

3. Maintain a Budget

Real talk: Anyone who has debt should be on a budget. Budgets are great for everyone, but those who owe money tolenders are prime candidates for a workable budget. Start by keeping track of your income and your spending for one month. At the end of that month, sit down and go over what you’ve recorded. Where can you cut back? You can’t be sure you’ll be able to make on-time payments unless you’re keeping track of your spending – and keeping it in check.

4. Seek Guidance

If you’re having trouble keeping up with your debt payments or you’re not sure how to tackle a handful of different debts, seek help from a non-profit credit counseling organization. A credit counselor will sit down with you and review your credit score and credit report. He or she will help you correct any errors on your credit report. Then, you’ll work together to set up a debt repayment plan. That may mean you make payments to your credit counselor, which then pays your lenders on your behalf.

5. Automate Payments

If you have debts to pay off then automation can beyour friend. Setting up automatic transfers for your bills and your loan payments will remove the temptation to overspend, tomake only the minimum payment or to skip a payment altogether. If you can afford it, set up automatic savings while you’re at it. The sooner you start saving for retirement the better. Just because you’re still paying off your student loans doesn’t mean you should defer your retirement savings until middle age.

What Not to Do When Borrowing Money

Now that we understand the “do’s” of the equation, it’s time to explore the things that you should avoid doing. From just deciding if you can make the monthly payment to avoiding any type of late loan payment, there can be a lot to consider. Here is what you may want to think about before taking out any loan.

1. Just Look at the Interest Rate

Comparing loans is about more than searching for the lowest interest rate you can get. Look out for red flags like prepayment penalties. Stay away from personal loans that come with pricey insurance add-ons like credit life insurance. These insurance policies, particularly if you decide to finance them by rolling them into your loan, will raise the effective interest rate on the money you borrow. Approach payday loans and installment loans with extreme caution.

2. Go Overboard With Consumer Debt

Consumer debt is generally considered bad debt. Why? Because it’s debt taken out for something that won’t appreciate. You’ll spend the money and get fleeting enjoyment but you’ll be making interest payments for months or years. In other words, it’s generally better to save up for that new tablet or vacation than to finance it with consumer debt.

3. Never Be Late

Speaking of making on-time payments: Making a late payment on a bill you can afford to pay is not just careless. It’s also a costly mistake. Late payments lower your credit score and increase the interest you owe. They can also lead your lender to impose late-payment penalties and increase your interest rate, making your borrowing more expensive for as long as it takes you to pay off your debt.

4. Throw Good Money After Bad

Why a non-profit credit counselor? Well, there are plenty of people and companies out there that want you to throw good money after bad. They may offer to counsel or they may try to sell you on bad credit loans. At best, they’ll charge you an arm and a leg for advice about debt repayment that you could be getting for free. At worst, they could lead you further into debt.

5. Borrow More Than You Need

You never want to borrow more money than you have a purpose for. Making payments on money you aren’t actively using is a waste of your money now and in the future. This entices you to spend unnecessarily but you may then be paying off that debt for some time. Before applying for a loan, know how much you need and don’t let anyone talk you into borrowing more than that.

The Bottom Line

Most of us will borrow money at some point in our adulthood. These days, it’s easier than ever to borrow money online and take on debt quickly. The choices we make about when, how and how much to borrow? Those can make or break our finances. Before you take on debt, it’s important to ask yourself whether that debt is necessary and how you will pay it back. Happy borrowing!

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