The Basics of Borrowing Money | United Way Worldwide (2024)

Borrowing Basics

People generally borrow money for big purchases, such as homes,cars, businesses, and/oreducation. These itemscost more than one paycheck and could bedifficult to save for within a reasonable amount of time. But, before taking on a loan, it’s important to understand some of the basics of borrowing money.

The first step is to makesure you really need the loan. Are the benefits of of what you will receive - for example, a home or car -- outweigh themonthly payments you will have to make for thenext three to thirty years?

Then, you need to make sure you understand the loan and key borrowing terminology. Be sure you understand the the interest rate, fees, and other charges. You will want to know when your payments are due and how to make your payments.You will also want to know about the possible penalties for making late payments orrepaying the loan early. And, you will want to know who you should contact if you have any questions about your loan.

Finally,you will need to make sure you qualify for the loan. Most lenders will want to see:

• Proof of stable income,
• Adequate savings,
• A good credit history, and
• Proof of any collateral securing the loan.

Lender will also calculate your debt-to-income ratioto make sure you can afford the new monthly debt payment.

While lenders will approve you up to a specific amount, consider borrowing less than the allowed maximum. This gives you a little cushion if your income should suddenly change.