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
Learn more about making a budget.
Learn more about credit or 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.
Learn how to manage your money when 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
Learn more about giving express consent for financial products and services.
Related links
FAQs
Before taking a loan, think about if you really need it and if you can afford the monthly payments. Look at the interest rate and how long you'll be paying it back. It's important to read all the terms and understand the total cost over time.
What are some considerations that should be made before borrowing money? ›
Before you take out a loan, prepare a budget and list your monthly expenses, savings and debt in detail. Work out to see if you can afford to repay each month. If you don't have spare money, you will find it hard to make the repayments.
What factors should you consider before deciding on how much to borrow? ›
Factors To Consider When Borrowing
- Loan Amount.
- Aggregate L oan Amount.
- Annual Loan Limit.
- Repayment Period.
- Minimum Monthly Payment Amounts.
- Borrowers Rights and Responsibilities.
The five Cs of credit are important because lenders use these factors to determine whether to approve you for a financial product. Lenders also use these five Cs—character, capacity, capital, collateral, and conditions—to set your loan rates and loan terms.
What are the four steps to consider before borrowing? ›
Here are four important factors that can affect your overall borrowing power:
- Your stated income. ...
- Your current debts and living expenses. ...
- Your deposit amount. ...
- Your credit history.
Called the five Cs of credit, they include capacity, capital, conditions, character, and collateral. There is no regulatory standard that requires the use of the five Cs of credit, but the majority of lenders review most of this information prior to allowing a borrower to take on debt.
What are the 4 C's of borrowing? ›
Standards may differ from lender to lender, but there are four core components — the four C's — that lenders will evaluate in determining whether they will make a loan: capacity, capital, collateral and credit.
What are the three main factors of a loan? ›
Other Factors That Affect Loan Structure
- Loan Term – The loan term refers to the terms and conditions of a loan. ...
- Principal or Loan Amount – The loan amount or principal is how much the loan is for. ...
- Collateral – The loan structure can shift depending on if the borrower puts up any collateral, such as personal assets.
Factors to consider before borrowing money
- Is it good to borrow money? ...
- The interest rate. ...
- Repayment schedule. ...
- Fees and charges. ...
- Your assets. ...
- Is it necessary to borrow the money right now? ...
- How long will it take to repay the loan? ...
- What is the best type of loan for my needs?
How much can I afford to borrow? Before taking on a loan, look at the big picture and don't take on more debt than you can afford. It's important to know how much your monthly payments will be to make sure you can cover them.
How to loan wisely? Consider these 5 things before applying for a loan!
- Assess your payback ability. ...
- Comparing APR. ...
- Interest discounts. ...
- Monetary habits affect your credit score. ...
- Preparation is key. ...
- Apply Now.
Consider your income, expenses, and other debts. If you are not sure you can afford to repay the loan, don't borrow it. Shop around for the best interest rate and terms. There are many different lenders out there, so it is important to compare interest rates and terms before you choose a loan.
What are six things you should consider before taking on a loan? ›
6 Important Things to Know Before Taking a Personal Loan
- Maintain a good credit history. ...
- Compare the interest rates in the market. ...
- Assess all costs. ...
- Consider your needs to choose the right loan amount. ...
- Evaluate your ability to repay the loan. ...
- Avoid falling for gimmicky offers and plans.
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.
What is the first rule of borrowing? ›
Don't borrow more than you can repay
The first rule of smart borrowing is to refrain from exceeding your financial capacity. Choose a loan that you can comfortably repay.
What factors should a person consider before obtaining a loan? ›
What to Consider When Taking Out a Loan
- Look at the Interest Rates. Interest rates play an important role in determining how much you pay back each month. ...
- Look at the Terms or Length of the Loan. ...
- Review the Lender's Reputation. ...
- Consider Access to the Lender.
- You need a reputable lender. ...
- Borrowing from family or friends can be tricky. ...
- The total cost of borrowing is more important than interest rates. ...
- The reason you want to borrow matters. ...
- Making a repayment plan may help you pay off debt faster. ...
- There are many different ways to borrow money. ...
- Loan agreements can vary.
