When you're short on cash, borrowing money might make sense. A loan gives your budget a quick injection of cash, so you can take care of whatever unexpected expense comes up.
But what about after you take care of your financial emergency? Is that loan still a good idea once it comes time to repay it?
To make sure you find the best option for your needs, here are the dos and don'ts of borrowing money to help you manage this task well:
DO Research Your Options
Comparison shopping is an essential part of borrowing money. This step helps you understand the kinds of financial products there are and how they work. These details ultimately set a loan's terms and conditions, so you don't want to skip this lesson.
If your search takes you online, make sure you pay close attention to your lender's location requirements. While online lenders may have a global site, they may only cater to certain residents. That's because lenders in the U.S. can only grant funds to borrowers who live in a state where they have a license. So, you'll have to be careful to look for online loans in Tennessee to get access to cash online.
While this task will help you find the best possible loan in the moment, it also has an added benefit of boosting your overall financial literacy. You'll have a greater understanding of how different products impact your finances.
DO Read Your Contract
If you want to know how much your loan will cost or when you're expected to pay it, you'll find these details in your contract.
Your contract is fundamental reading material. Although it may not be the most riveting piece of writing you'll read, it could be one of the most important things you read in your life.
DO Pay Bills on Time
When it comes time to repay what you owe, don't be late. A late payment may come with some hefty consequences, as most lenders apply a late fine, and you'll accrue extra interest. You may even add a negative entry to your credit report and lower your score.
What kind of loan you choose may help or hinder this task.
Take, for example, a direct payday loan. It's due back all at once by your next payday. You'll only have to remember one due date, but it will be a lot of money upfront.
Now compare this to an installment loan. It comes with a longer term, which spreads out your repayment over multiple installments. You'll have multiple due dates to remember, but each payment will be smaller, which may make it easier to budget.
DON'T Forget Other Bills
Paying your installment loan back on time is critical, but it should never come at the cost of other financial responsibilities.
If you can't make your scheduled repayments without paying another bill late, this is a sign that particular loan isn't for you.
DON'T Disregard Your Budget
A budget is your spending plan that helps you make sure your cash goes where it needs to be every month. Make sure you update this plan when you borrow money.
In fact, it's always a good idea to add a potential loan to your budget before you even borrow it. This helps you see if you have enough cash on hand to handle this and your other responsibilities at the same time.
A budget is fluid, so don't be scared to change things around. If you manage to cut out some unnecessary expenses, you'll free up more money to go toward your repayments.
DON'T Borrow to Splurge
A loan isn't like that $5 you borrowed from a friend that you can repay whenever. It's a financial product with important due dates. More than that, it comes with rates, fees, and other charges that mean you're paying to borrow money.
It doesn't make sense to pay these fees if you don't have to, which is why most financial advisors recommend you borrow only in emergencies. For everything else, like vacations and shopping, wait until you can save up the money you need.
The only exceptions may be buying a home, car, or education. These big-ticket items may cost too much for you to save up for on your own, so plenty of people supplement their savings by borrowing money.
Almost everyone borrows money at least once in their lives, but that doesn't mean it's the most intuitive experience in your life. Use these dos and don'ts as a rubric for the next time you need to borrow funds. They'll help you find the best options available and manage it better.