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09/26/2012

Do You Have a Responsible Borrowing Strategy?


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It is almost inevitable that at some point in your life you will have to borrow money to make necessary purchases. Items that are synonymous with the phrase, “We need a loan,” are typically major financial obligations such as a home, car, or college education.

According to the Federal Reserve System, there was $12.9 trillion in household debt outstanding at the end of the first quarter of 2012. Meanwhile, as of August 2012, the Federal Reserve Bank of New York reports household indebtedness at $11.38 trillion. The bank also reported that student loan debt rose to $914 billion last quarter.

For most Americans, $40,000 a year for college isn’t pocket change, meaning they will need some form of a loan in order to afford an education.

It doesn’t require an accounting degree to ensure that you borrow money sensibly and responsibly, but there are several important factors to consider when taking out a loan, including:

  • First and foremost, before even going to banks to find rates on loans, you should check your credit score and resolve items that are incorrect or unhealthy. You are entitled to a free credit report once a year from each of the three major credit reporting agencies—Equifax, Experian, and TransUnion. Be sure to take advantage of this.

    A bad credit score will affect the interest rate and other conditions of your loan—and not for the best. In other words, the better your credit score, the more trust a bank places in your ability to pay back that loan and the less risk the bank must assume in approving a loan.

  • Second, when planning to take out a loan, seek an amount that is reasonable and within your means to repay without the necessity of having to make drastic sacrifices. In short, it’s always a good idea to take out only as much as you need.

    Create a budget to determine how much you can afford, taking into account all of your current income and expenses, including any other loan obligations and credit card payments. This will provide you with a base available amount you can use to determine what you can afford.

  • After you check your credit reports and decide on the principal loan amount, the next step is to shop around. Do not just take the first loan that is offered to you. You may prefer to deal with your local bank but be sure to explore other options.

    Every bank is slightly different and may offer you a better interest rate or more favorable terms. For example, one bank might ask for a higher minimum on monthly payments but charge a lower interest rate, while another bank offers lower monthly payments but a higher interest rate. As mentioned previously, your choice should be guided by your budget and the amount you can reasonably afford to repay on a monthly basis.


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For the average American, loans are a commonplace feature of life. But with loans come potential pitfalls that can cause significant and long-term financial harm: Take on too much and it can hurt your chances of securing other loans in the future.

However, by following some simple tactics and guidelines, such as budgeting and not over-extending, it’s possible to skirt the dangers and stay out of credit trouble.

–Jessica Edmonson

This guest post was provided by Jessica Edmondson who contributes on Online Business Degrees for the University Alliance, a division of Bisk Education, Inc.

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Comments

I am taking out my very first loan for college, and I have no idea what to do first, and how to do it. I'm very grateful that you took the time to make a step by step tutorial, and that you included the small things, such as checking your credit score. I've never looked at my credit score before, and I think it is probably the best place for me to start before going to the banks, like you said.

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