Borrowing money can be a great option when you need a little help managing expenses — from the planned (like a new home or car) to the unexpected (like medical bills or home repairs). But if you’re not careful, taking out loans to get ahead could cause you to fall behind. These “do’s and don’ts” will help guide you in making better borrowing choices and staying on the smarter side of financial management.
- Borrow for things that will give you a return on your investment. An education, your home, or a business are all expenses that can pay off in the future. The same goes for items that continue to be useful after they’re paid off, like a car. On the other hand, try to avoid borrowing to pay for short-term splurges like a vacation, designer clothes, or expensive meals.
- Pay back what you borrow as quickly as you can. Try to pay more than the minimum due each month on your balance. You’ll not only pay less in interest over the life of the loan, you’ll also free up funds for other expenses sooner rather than later.
- Understand your borrowing terms. Carefully review the fine print so you know exactly what to expect. For example, is there an introductory rate with a specific low-interest period? Is your interest rate fixed or variable? How often and how much can it change? Are there prepayment or late payment penalties?
- Pay on time. Make your loan payments on time — every time — to avoid extra fees and possible interest rate increases. Late payments can also negatively impact your credit score, making it more difficult to borrow money in the future.
- Borrow more than you can afford to pay back. As a general rule of thumb, financial experts recommend maintaining a debt-to-income ratio of 20 percent or less. In addition, a mortgage payment that is no more than 25 percent of your net pay can help ensure that you’ll have enough of your income left to pay for other living expenses.
- Ignore your annual percentage rate (APR). Pay attention to this number when comparing your borrowing options, since it represents your total cost to borrow money. Your APR includes your interest rate charges and any applicable fees.
- Forget to keep saving. Even though you’re working toward paying down a debt, be sure to keep saving for future goals, like that vacation or home renovation you’ve been planning. You’ll be less likely to borrow in the future if you have the savings set aside to pay for it.