In the life of the average American, three things are certain: taxes, death, and any guesses? Loans!
In the United States, 80.9 percent of boomers, 79.9 percent of Gen Xers, and 81.5 percent of millennials have some form of debt.
Well, this isn’t to say debt is a bad thing. In fact, to build credit you need to take a loan or get a credit card. However, if you aren’t careful with your finances, it’s easy to spiral into a hole of debt.
This is why you need to learn about borrowing money before you even approach a potential lender. Here’s a brief guide.
You’ve never secured a loan before, so you probably don’t have a credit history. Yet, the vast majority of banks and other lenders will want to see your credit score before approving your loan application.
Does this mean newbies can’t get a loan?
Well, you can, but you’ll have to go for loans that are designed for people who’re looking to build credit. And if you have a job with a steady income, you might qualify for personal loans offered by online or alternative lenders.
There’s also the option of getting a secured credit card. You’ll pay a refundable security deposit, which will also serve as your credit limit. As you settle your balances, your credit score will start rising.
A good number of people take out loans for purposes that aren’t pressing. Or they have a good reason when applying for the loan, but end up using the funds for entirely different purposes.
As a newbie, it’s vital to develop a habit of borrowing money only when absolutely necessary. Don’t get a loan because you want to upgrade your wardrobe or apartment. Get a loan because your car has broken down when you’re broke and need to fix it urgently.
Other good reasons to take out a loan include paying for medical expenses, paying for moving costs (especially when you’re relocating for work) and buying a car for your commute.
A mistake most newbies make is borrowing way more money than they need, especially when they have a valid reason. You can easily make this mistake, too.
Let’s say you have a $500 health bill to clear. Your paycheck isn’t in yet, so you head to your bank and apply for a personal loan. To your surprise, you learn that you qualify for up to $1,500!
Lost in excitement, you take out $1,000. Big mistake!
Borrowing more than what you need is a sure way to lose money because you’ll pay a lot more interest to the lender. Plus, if you lose your job before you fully repay the loan, your account could go into collections. This also means your credit score will take a hit.
For most people, borrowing money is part of life. This is nothing to be ashamed about. However, you must practice responsible borrowing; otherwise, you’ll set up yourself for financial ruin.
All the best and keep tabs on our site for more financial tips.
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