What Does It Mean to Borrow Responsibly?

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Thanks to predatory lenders, borrowing money is really easy. But they’ve also made borrowing responsibly much, much harder. For people with low income and/or poor credit, it’s not enough to simply avoid predatory lenders. You also need to know how to borrow responsibly.

Here are the 4 keys to responsible borrowing:

1. Only Borrow for Need

You should never take out a loan unless you absolutely have to. Remember, borrowing money is going to cost you money. You shouldn’t be signing up to pay that extra money unless the loan is really worth it. So always make sure to ask yourself why you are applying for this loan. Is it because you need money to fix your car? Great! Is it because you want to consolidate your credit card debt? That’s fine! Is it so that you can pay for that vacation to Greece even though you can’t really afford it? Umm…

2. Know What’s Available

There are two parts to this. First off, there’s knowing what kind of loan you qualify for. That means knowing your FICO credit score and understanding what kind of loans and rates you can get. (Check out the next section to learn more about your credit score.) Once you know your credit score, you can then start shopping around. Check out different kinds of loans and different kinds of lenders. Don’t just go with the first offer you see. Take the time to find the loan that works best for you.

3. Understanding Your Contract

Even before you’re approved for a loan, you should be asking questions. Is the interest rate the lender showing you the same rate that will apply throughout the life of the loan? What kind of fees and penalties are there, and are there origination fees that will be deducted from the principal? Can the lender provide you with an amortization schedule? And once you’ve asked all the questions you can think of, you should still take the time to read the contract. If what’s in the contract is different than what the lender’s been telling you, that’s a big red flag.

4. Affordability

You should never get a loan that you cannot afford. It can be tempting in an emergency to just get the loan and deal with the consequences later. But rest assured, “later” is going to come a whole lot sooner than you think. Make sure you can handle both the monthly payments and the overall cost. And here’s an additional tip: make sure you can afford more than the monthly payment. Give yourself as much wiggle room as you can. Because if your budget doesn’t leave room for surprise expenses, then it also doesn’t leave room for reality.

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