What to consider before borrowing money
Responsible borrowing can help you build a good credit history. However, using credit to spend beyond your means can cause you financial problems.
Reviewing your budget when borrowing money
Ask yourself the following questions before you take out a loan or a line of credit:
- how much do you want to borrow
- how much can you afford
- do you need the money now or can the expense wait until you've saved for it
- how much will you be able to pay back each month
- will you still be able to afford the payments when interest rates rise
- what happens if you miss a payment
- do you need loan insurance
What is the difference between a good debt and a bad debt
Good debt is an investment in something that creates value or produces more wealth in the long run.
Examples of a good debt may include:
- a loan for home renovations which may increase your home’s value
- a student loan that may help you to get a job with a higher income
Bad debt is borrowing to buy something that goes down in value or that you can’t repay on time and in full, thus incurring interest charges and more debt.
Examples may include:
- going into debt for a vacation
- buying an expensive dinner with your credit card while knowing you can’t repay it by the end of the billing period
You may end up paying for these purchases long after you’ve enjoyed the holiday or the dinner.
What happens to your loan payments if interest rates rise
If your loan or line of credit has a variable interest rate, your monthly payments may go up if interest rates rise.
Reviewing your credit or loan agreement
Read the terms and conditions of the credit or loan agreement carefully.
Take a close look at interest rates and fees. You may be able to negotiate the interest rate and terms of the agreement.
Ask your lender about anything you don't understand.
Lenders must get your consent before adding services to:
- your loan
- your line of credit
- your credit card
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